by Larry Goins
I want to share with you some ideas on using real estate to become debt free and build your cash reserves. It has worked for me and I have also shared this with many other investors and it has also worked for them. Many investors start out in real estate thinking that you have to “have money to make money.” That is not the case at all. You will need one of two things though: either good credit or cash. It doesn’t have to be your cash or credit as far as that’s concerned. It’s OK to start out with other investors until you can do it on your own. I would rather share the profits and have some of something-rather than all of nothing.
We only buy when we can get paid and still cash flow the property. Let me explain. Let say you find a property that has an after repaired value or ARV of $100,000. Because the property needs $20,000 in work you can buy it for $50,000. Now you will be in the property at 70% of value once the work is done. Whether you paid cash, borrowed from relatives or got a hard money loan for purchase and rehab, makes no difference. Once you have a $100,000 property you can now refinance at 80% loan to value or LTV and after closing cost pull out about $7,000 to $8,000 in tax free cash. Yes, you do not pay taxes on borrowed money.
But just remember that it is still borrowed money and has to be paid back, even if it is the tenants that are paying it back. I do not recommend refinancing over 80% loan to value. This way you still have some equity for your financial statement and the property should cash flow with no problem.
Now, what do you do with the cash out from the refinance that you just received? No you don’t buy a new car, go to Vegas, or anything like that. You simply pay off a credit card, installment loan, your car, your equity line, etc.
You can buy real estate and get cash to pay off your personal bills and increase your cash flow from the rents at the same time. If the property you just bought and refinanced has a $200 cash flow but you also used the cash out to pay off your car that has a $300 payment, how much did you really increase your cash flow? $500! Every time that you buy a property think about what bill you will soon be able to pay off.
Once you have all of your consumer debt paid off then you start paying off your home that you live in. Once your home is paid for then you go to your banker and get a line of credit on your home to use to buy and rehab properties. Then you simply refinance once the work is done and pay off the line.
It is much easier to negotiate with a seller when you can simply write a check to purchase their property. Then when you ask a seller the least they will take if they can have a check by Friday, you can back it up. Sure, it may take some time to get to this point but once you have become debt free (with the exception of rental property, of course) it opens up so many options for you to do things that you have never been able to do. Not to mention the peace of mind.
We have a property analysis form that we use to determine if a deal will fit into this plan. The form even shows the cash flow, cash out and equity gained by purchasing each property. If you would like a copy, please visit the “Freebies” section of www.larrygoins.com.
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