Turning $10k into $225k
“It takes money to make money.”
Sure, but how much of that has to be your own money?? Leverage is a beautiful thing.
In my early real estate days I had to get scrappy and creative in order to spread out my limited capital into as many deals as possible.
I did this through partnerships, where I did all of the work and gave some friends a great return on their investment. The beauty of it is that you can too.
Turning $10k into $225k meant getting creative, combining strategies, and constantly putting equity to work.
Let’s dive in, and hopefully along the way you’ll see how achievable this is for you too!
$4k to Play
They say that if you find a good deal, the money will come. I was skeptical, but I knew I had a deal and would be stupid to pass it up.
What was the deal?
Three duplexes on one parcel
$2,000+ current rent
$2,700 market rent
$155k purchase price.
Who could complain about those numbers?? I even had it under contract for a little under my target price!
All of the pieces were there with one exception - the funding.
I was already under contract for a quad that was going to tie up a significant chunk of capital so putting the required 25% down was out of the question. I needed to get creative, and I had a potential partner in mind.
While flipping burgers at a Fourth of July barbecue with my best friend I decided to run the deal by him to pressure test the way I planned to pitch the partnership structure.
Here’s what I laid out:
50% of the equity was mine for finding and running the deal
50% of the equity would be split based on the amount of cash each person brought to the table (so if the partner brought all the cash, he’d get 50% equity. If he brought half the cash, he’d get 25%)
My friend shared his insight, we ate dinner, and we moved on.
A week later I realized I never asked if he was interested in the deal. I called him laughing and he immediately said yes!
As we finalized the terms he said he wanted me to have some skin in the game. I put in 10% of the cash to close which amounted to $3,931, locking in 55% of what would turn out to be the best deal in my portfolio for years to come!
Due to the nature of the 6-unit property we had to use a commercial loan instead of a conventional mortgage. This brought a shorter amortization schedule and higher payments, which I planned to alleviate by subdividing and then refinancing.
I spent $2,500 subdividing the lot as planned and started the refinance process, only to discover how incredibly expensive three separate loans would be to close.
Instead I found a commercial lender that would refinance for us and allow us to tap into any equity if we had any.
I distinctly remember opening my email and finding the appraisal report stating a value of $85,000.
That was horribly disappointing considering I bought it for $155,000, until I realized my error.
$85,000 each. 3 duplexes. $255,000 total.
Why was it worth so much more? It opened up the buyer pool significantly. I had to purchase it with a commercial loan, which many new investors aren’t going to do. By subdividing it now qualified for a conventional loan, and it even opened itself up to a potential house hacker.
As a result, 6 months and $2,500 later, this deal had made us $100,000. My $4k was worth $60k, and the snowball was building.
Putting Equity to Use
That appraisal allowed us to complete our refinance and add a line of credit for $72,000.
After a brief consideration it was clear that the line of credit was a far better option than a cash out refinance that would wipe out our cash flow.
Now it was a matter of putting the equity to use. We first did this by flipping houses.
We drew on the equity line for two separate flips, with the interest payments getting rolled into the flip expenses instead of the rental overhead.
The flips created a net profit of a little over $40k, of which $22k was mine.
My $4k was now worth around $82k in about a year and a half. That’s a 1,300% return on my initial investment, not to mention the cash flow that was providing a COCROI of 135%.
By late 2021 the real estate market was on fire and we decided to lean into the market. We listed the property for $425k and surprisingly went under contract!
This time we needed to put the proceeds to use when it sold, so I found an 18-unit apartment for $750k and we went under contract. The plan was to place the proceeds from the sale into a 1031 exchange in order to defer capital gains tax.
Unfortunately, the sale fell apart while under contract for the 18-unit. But at that point the acquisition was underway so I had two options - blow up the 18-unit deal because the down payment was gone, or figure it out.
I knew this was a great deal, so despite needing almost $200k to close the deal I knew I’d find a solution. Remember how this started? If you have a great deal, the money will come.
I found another partner to fund a significant portion of the down payment, we used the line of credit from the 6 units, and I brought another $6k to the table.
My original partner and I picked up a majority of the equity in the 18-unit, paid for by equity in the 6-unit, and we still owned both. Amazing!
And at this point I was all in on over $1M in real estate for $10k. Isn’t leverage cool?
Once again, I had the opportunity to add significant value to the 18-unit apartment. Over the course of the first 9 months it underwent a massive renovation, completely updating 6 units and replacing 8 HVACs.
Though it took a considerable sum of money to make it happen, it also increased the cash flow significantly and therefore seriously increased the value.
We recently decided it was time to sell after realizing that we could get over $1M for it. An investor scooped up the deal without ever going to market, we close in March, and I stand to profit roughly $50k! Not bad for only one year of ownership.
In addition, the 6-unit underwent a small renovation with rent increases across the board and is now up for sale again!
Assuming both deals close as expected, my profit will come out to roughly $180k. When I add in the profit from the flips plus 3 years of cash flow, my total return comes out to roughly $225k.
I invested $10k, and I turned it into $225k in under 4 years. I’ll take that any day!
What’d I learn?
There are so many lessons throughout this story, so let’s focus on the top 4.
When you have a great deal, the money is the easy part. In both cases the deal came before the partner did, but the deals were strong enough to entice the right people!
Know how to add value. In the first deal I knew that I could add value by subdividing, I just had no idea how much. In the second deal I knew that by increasing NOI I’d significantly increase the value, so I focused on renovations that bumped up rents
Tap that equity! These deals opened up the playbook on how to maximize the return on equity. The line of credit was better solution than a cash out refi; flipping a couple houses with the LOC added years worth of cash flow to our bottom line; tapping the equity to buy a new asset allows our portfolio to scale even faster; and selling at the right time can lock in gains that can create even greater returns!
There is no manual. Sometimes you have to trust your gut and do what makes sense. There is no one-size-fits-all solution or strategy, there’s what works for you in your situation. That might mean following the traditional approach to a BRRRR, it might mean combining 7 different strategies to make a great deal happen. Do what works for you!
I know plenty of people may balk at the idea of selling both of these cash flowing assets, and the decision on where to put the proceeds of the sales is a big one. We’ll cover that in the next post 🙂
In the meantime, let me know…did this open you up to any new strategies? Which of these approaches have you used?
Let me know in the comments! And if you need help getting unstuck, schedule a discovery call!
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