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What Is Your Investment Plan?

I talk to a lot of investors and the first thing I ask them is, "What is your plan?"  I get varied responses, especially from the seasoned investors, but a lot of times the new investor will say, "I don’t have a plan."  Once again the "Real Estate Evangelists" have sold someone a concept but have failed to assist them in developing a plan.

I met Becky in June of 2005 and when I asked her, “What is your plan?”  She explained she was not sure about her plan but she did have a specific goal.  Her goal was to start a real estate investment career in order to pay to pay for her 4 and 6 year old children’s college education.  Becky and I set out to develop “her” plan. 

Becky understood the power of leverage and the concepts of creating wealth and creating income.  We decided to try to find two long term hold (creating wealth) and two quick turn (creating income) properties per year. Next we had to find the funds to finance her properties.  

As a stay at home Mom, Becky explained she had little liquid cash to invest but was looking for ways to borrow the money to get started. What Becky didn't realize was that the home she was living in was the key to her investment career. Once she realized that she and her husband had over $150,000 in equity in their house, Becky went to her local bank and set up a line of credit.

They bought their first rental property and paid cash (from their equity line), did repairs, had the house appraised and did an 80% cash out non seasoning re-finance. The result was a positive cash flow rental, with 20% equity with no money out of pocket. Not bad for your first house.

She purchased two houses for long term hold her first year.  Both were purchased using the equity line and both were refinanced at 80% Loan to Value (LTV).  Both houses appraised around $115K and she owes around $92k on each properties.

Let’s fast forward ten years look at her options. At 4% appreciation, the houses would be worth around $162,000 in ten Years. She would owe approximately $78,600.

Option #1:  

• She could do a 80% cash out re-finance
• Present Value         $162,000
• 80% Cash Out Re-Fi    $129,600
• Loan Balance10 years     $78,600
• Cash Out             $51,000 

Option #2:

• Sell at 90% for $146,676
• $68,076 Profit ($51,057 after taxes)

 

Either option will net her over $100,000 in ten years – remember she has no money out of pocket.

Today, her business model is to buy 4 houses a year for the next ten years - two to hold and two to quick turn. She will either sell or refinance her “hold” properties after she has held them for ten years, thus creating a residual income of $100,000 per year.  

Becky understands leverage and return on investment. Her latest house (a quick turn), which sold for $124,000, will net her about $12,000 on a quick turn. That's $12,000 after repair costs and the interest on her equity line is paid. She has no money out of pocket. She told me: "I cut the grass 7 times and spent 4 hours cleaning the house after the paint and carpet was done. I got 12 hours of my time invested in this house." That’s about $1,000 an hour. Not bad work if you can get it.

Leverage: She controlled a $124,000 property with no money out of pocket.

ROI: 12 hours = $12,000

Becky and her husband are members and followers of the VESTLET 10-Year-Millionaire plan. They realize the power of leverage and appreciation.  The appreciation of her rental properties will pay for her children’s college education.

What is the Vestlet 10-year millionaire plan?  Buy 2 properties for long term holds and two properties for quick turns every year for the next ten years.  There are no get rich quick schemes, just steady, consistent investments.  What I the first step?  Set a goal and develop a plan to achieve the goal.  Someone asked me one time, how to win a bid on a HUD property.  My answer – “bid.”  Take action, make a decision, and get started.