I gave him a hard money loan to buy this house which he is going to fix up and rent out and then refinance. He paid $121,000 for this property and it should appraise for around $165,000.
Paul is doing exactly what I did when I first started out. He is purchasing the property, repairing it, renting it out and then refinancing and paying off the hard money loan. Doing this allows him to pull his cash out as long as he is all into the property for less than 75% of ARV. In this case, ARV is $165,000 so he will probably come out of pocket a little (around $12,000) but he will have equity in the property of $32,000. We are assuming a $165,000 appraisal and a $128,000 loan. The net difference is $20,000 which he will put in his pocket.
Some people refer to this as the BRRR method which stands for Buy, Repair, Rent, Refinance. After he has a tenant in place and gets an appraisal, the bank will loan him 80% of the appraisal value in a conventional loan. That amount should be about $20,000 more (after fees) than what he put into the property as explained above. Once he has completed the refinance, he can take the same funds and buy another rental property. You can do this 10 times and buy 10 rental properties this way as long as you have a decent credit score and a steady job with a paycheck. It’s important to note that you can use the same funds over and over again. Meaning that Paul could take that $20,000, buy another property (with a loan from me) and then refinance that and Paul his funds out again.
So if you have a job, a decent credit score and a little bit of money saved then this is a great strategy for you to employ as a real estate investment. Income property provides you income every month. And if you put a 15 year mortgage on the property then 15 years from now you will own it free and clear. This becomes a great retirement vehicle.
Buying great rental properties starts with knowing how to find deals. Learning how to find deals and how to wholesale is the best place to start out.
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