Story

He drew the whole strategy on a napkin, then crossed out the last step

I went to a coffee thing where people talk about investing, mostly to listen. A man across the table asked what I was reading about and I said the buy, rehab, rent, refinance, repeat thing, and I said it in exactly that stiff way because I had only read it, never heard anybody say it out loud.

He took a napkin and wrote the five words down the side in a column. Then he explained each one to me like I was ten, which I appreciated. Buy something rough and cheap. Fix it. Get a tenant in so it produces rent. Go back to a bank, get the house appraised at the new higher value, and borrow against that to pull your own money back out. Then use that money to buy the next one.

Then he put a line through the last word.

He said for him it currently reads buy, rehab, rent, refinance, wait. He gets some of his money back, not all of it, because the loan he can carry against the rent at today's payment is smaller than the loan he could have carried three years ago. So each house leaves a little of his cash behind, and he has to save up the difference before the next one.

He folded the napkin and gave it to me. It's on my fridge with the line through the fifth word and I keep looking at it.

10 replies

mikeoconnell7SP2APRO6

That napkin is better than most of the courses being sold on this. The fifth word is where all the money and all the disappointment lives.

laurenkim53Passive

Out where I look, low price points, the crossed out word shows up for a different reason. Value goes up after the rehab but the ceiling in a small town isn't very high, so the appraisal caps out and there just isn't enough new value to borrow against. Two rehabbed houses on the same block set the top of the market and then that's it.

brandonlee36Passive

@hollow that's real and it doesn't get said enough. I have a house where I could spend another 20k and the appraisal wouldn't move a dollar because nothing in that zip has sold above a certain number in three years.

stephen_ok9CO2CPRO6

So the actual version of the strategy is that it recycles most of your capital in a good rate environment and some of it in this one. That's still better than putting a fresh down payment into every house from savings.

mitchell_ray4 Get yoursPRO6

@meridian right, and from the tool end of it, the rehab is also more expensive than the napkin math from a few years back. Material prices and labor both moved. So you're spending more to create the value you're then allowed to borrow less against.

tashaford30PB2APRO7

I'm planning a first purchase and this thread just changed the amount of cash I think I need on hand. I had been assuming the money comes back and comes back whole.

nataliehsuSO1BPRO7

Why does the bank care about the rent at all if the house appraised higher? That's the part I don't follow.

renee_dubois Get yours

@plumb because the bank is going to be paid back out of the rent, not out of the value. The value tells them what they could sell it for if everything goes wrong. The rent tells them whether the monthly payment gets made. When the rate goes up the payment goes up, the rent stays where the market has it, and the loan they'll write shrinks to fit.

I own small multifamily and every building has taught me that same sentence in a slightly different accent.

sonia_alvarez Get yoursPRO6

@plumb and the specific ratio they use varies by lender and program, so get the number and the rent figure they're plugging in from your lender in writing rather than from a forum. @cairn has the mechanism right.

bmoreno23AB1B

Starting from zero over here and this napkin is the first time the whole thing has sat still in my head. @juniper if you ever lose that thing off the fridge I'm going to be upset about it.