|With this bad flip, I had $285K of my own cash tied up in this Mulberry house but couldn’t sell at a price point to make a profit. I had to come up with some creative ideas to turn a bad flip into something better. Before reading this blog, read Part 1 at this link on how Mulberry became a bad flip.|
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Sell or Rent Mulberry
When putting the Mulberry house on the market, my realtor wanted sole rights to represent me in advertising/selling my property. We agreed and signed a contract that he would be the only realtor that could sell the property for the next 4 months. To have an escape clause, I negotiated an option to advertise Mulberry as a rental property through a separate property manager in parallel of listing the property for sell. The reason for the clause was my doubt of getting an offer over $300K needed to break even on this flip. Also, after the blood, sweat and tears my brother and I put into this house, I wasn’t sure I wanted to sell.
After receiving several purchase offers in the low $290K, I decided that I had to convert Mulberry into a rental property. Hey, I already owned 3 other SFH rentals in Texas so why not make it a fourth. Weeks leading up to this decision, I had vetted property managers and done market research on what the for rental range in the neighborhood was.
Immediately after my new property manager listed Mulberry for rent, we received many inquiries and decided to accept an offer from a tenant who wanted a 2-year lease. Of course, my realtor was not happy about this and pressured me to keep Mulberry on the market for a few more weeks since he was certain an offer above $300K would come in. Desperate for cash flow and deep down not wanted to sell, I rented out Mulberry. Of course there always has to be one more expense – purchasing a refrigerator for the kitchen since converting to a rental. Again money going out!!!
What a stress reliver to stop the hemorrhaging of money and now getting rental income coming in. I still needed to figure out how to best leverage the equity in this Mulberry flip house that was now going to be turned into a BRRR (Buy, Rehab, Rent, Refinance). In BRRR, I had already done the Buy, Rehab, Rent and only needed to Refinance my money out. The problem is closing cost add up with purchasing, selling or refinancing a house so I didn’t want to do a cash out refinance on Mulberry to turn around and purchase another SFH rental since that would accumulate two different closing cost. So, to reduce closing cost, I began to think if there was a way to do ONE closing that would allow me to pull equity out of Mulberry to purchase another.
This is where it gets a little complicated
I knew I had about $300K of equity in Mulberry and with most lenders they will only refinance up to 75% loan to value (LTV). With 75% LTV, I could leverage about $225K in equity to purchase another SFH rental. Well, I started to get even more creative and started to think what if I included one of my other TX properties (WakeBridge) valued at $265K with an exiting loan of $37K. With 75%LTV on this WakeBrdige property, I could leverage an additional $213K. (I wrote a blog about WakeBridge as my first SFH purchase at this link)
Mulberry – $300K of 75%LTV = $225K
Wakebridge – $265K of 75% LTV – $35K(existing loan) = $163K
Total equity at 75%LTV is $388K
How to make this equity go far
I started contacting commercial lenders to see if they would even entertain my creative financing idea of using the combined equity from 2 of my rental properties to provide $100K cash out and to bulk purchase other properties. To recoup from the hemorrhaging of money from the Mulberry rehab, I needed $100K cash out to resupply all my bank accounts that I drained to fund Mulberry and to also have reserves for a rainy day. Oh, to make this even a little more interesting, the bulk purchasing of the additional houses would be in 2 different state so I needed to also find a title company that could pull off doing a single closing of several properties on the same day in different states.
After negotiating with a commercial lender who was interested in financing my crazy idea, we agreed on loan terms of financing $670K (65% LTV for estimated value of property at $1.03M). This included purchasing 4 properties at combined purchase price of $499K, paying off the existing Wakebrige loan, covering closing cost and $105K cash out at closing.
When you add it all up, the closing cost for this bulk deal was $27K which comparable to a traditional residential loan was a lot cheaper. Let’s assume that on a traditional financing to purchase a SFH the closing cost averages $10K, so in this deal with 6 separate traditional closing could have been $60K . Lastly, since this was a commercial loan, it doesn’t count against my limit of only having 10 traditional residential loans in my name.
Estimated Value of Property $1,029,850.00
Number of Properties 6
Estimated Loan to Value 65.00%
Payoff of Wakebridge Mortgage $37,328
Purchase Price of properties $499,800
3rd Party Closing Costs (Title, Recordation, etc.) $6,000
Origination Fee $11,714
Processing Fee $1,750
Legal Fee $4,000
Estimated Initial Deposit for Escrow $3450
Loan Amount $669,402
Cash to Borrower at Closing $105,318
Where did the $499K Purchase Price come from?
Still licking my wounds from the Mulberry flip gone wrong, I was in no mood to do another flip or even minor repairs on a rental. Also, I needed to find several properties that I could close on the same day so started to research turnkey properties. I’ve bought turnkeys in the past and knew that they sell remodeled houses with tenants and property managers already in place.
From Bigger Pockets forum, I found a turnkey that could provide several properties at one time. Unfortunately, with this turnkey operator this was a very bad experience since they were not honest and their houses were in poor condition. After spending over $6K in property inspection, I uncovered major structure problems, poor quality in remodel and incorrect plumbing and electrical work. Again, money going out, but as the saying goes – sometimes the best deal is a deal you don’t do.
After finally walking away from this turnkey provider, someone recommended Bridge Turnkey in Kansas City MO. I’d never been to Kansas nor ever invested in this market. Bridge Turnkey was awesome in answering all my questions, providing 4 properties that met my requirements and accommodating my timeframe to close. I highly recommend them.
The 4 purchased properties
The 4 properties I selected where 3 bedroom 1 bathroom with a purchase price of $119K or $129K. Also Bridge Turnkey had a guarantee for the $119K properties to get a monthly rent range between $995 -$1050 and the $129K properties to get a monthly rent range between $1025 – $1095. Theses purchase price, rent range, fully rehabbed, being rented out and able to close on the same day fit all my requirements. Also Bridge Turnkey provided 1 year home warranty on the properties.
Kansas rental 1 $119K
Kansas rental 2 $119K
Kansas rental 3 $129K
Kansas rental 4 $129K
With the right mindset, anything is possible in real estate. It felt like every step in this journey was nothing but challenges to include rehabbing Mulberry, trying to sell, creative financing, finding a turnkey operator, etc. With creative thinking, I was able to recover from a bad flip with $105K in cash while added 4 properties to my portfolio. I also realized there is a slim chance I’ll never do a flip again. There is just to much risk compared to building equity through rentals. I can say that I gained so much experience in the rehab of Mulberry that I can over come any obstacle/road block no matter how challenging.
If you have any additional questions, please email me directly at James@jcoreinvestments.com