No doubt 2019-2022 has been a challenging period for investors nationwide. Either the competition for great properties has become intense, renters not paying rent or lenders are tightening the purse strings. Either way, it’s limiting growth for investors nationwide. We can turn the tables on this very competitive market to our benefit. Here are a few facts to consider for 2022 and how we can work around the obstacles.
☛Current Foreclosure Stats
☛In January there was a seven-fold increase in foreclosure submissions. This is as compared to December. According to a report from mortgage data and analytics company Black Knight we had 33,000 loans referred to foreclosure.
☛What’s more, data from real estate data analytics firm ATTOM Data Solutions revealed that as of February 2022, lenders repossessed 2,634 properties. It was an increase of 70% from last year.
☛According to ATTOM Data Solutions, the number of U.S. properties with foreclosure filings in February was 25,833.
☛This is up 129% from February last year. A fact in part because foreclosure activity remained low due to the pandemic. This was due to the moratorium on foreclosures.
☛The Biden administration’s final extension of the moratorium on foreclosures ended July 31, 2021.
☛The extension of the evictions moratorium for foreclosed borrowers ended on September 30, 2021.
☛It is also worth noting that foreclosure filings increased by over 11% from January to February.
☛This rise in foreclosures follows the roughly 29% increase in foreclosure filings. That occurred from December 2021 to January 2022.
☛Researchers at ATTOM report that this month-to-month double-digit increase is in line with current expectations. It will likely continue for at least the next 6-18 months.
☛After two years of low foreclosure numbers due to government and industry programs designed to protect homeowners impacted by the pandemic, times are changing. These increases signify the gradual return to normal levels of foreclosure activity.
So, where does that leave you as an investor???…and what’s your window of opportunity?
💎TIMELINE (12-18 MONTHS): Gearing up this year and repositioning yourself early to maximize your investment potential is the key to building a strong portfolio. This is especially important in the next 18 months. The flexibility of having cash reserves allows you the freedom of acquiring great opportunities that make sense.
💎YOUR MISSION: Stick to properties that are in your investment profile and trajectory. This will help you find and acquire the right type of investments for your current strategy in the 18-month timeframe. Everybody loves a unicorn but sticking to what you know is the right move. Grow your business from Single-Family to Multi-Family and eventually Commercial and beyond, but that takes time to make those bold moves. We buy portfolios of investors that chase the unicorn and end up having to liquidate because they overextend themselves. Build your business to better your life and not build a bigger noose around your neck…so stick to what you know. Remember the window of opportunity is only 12-18 months…so don’t delay.
💎THE PLAN: Being liquid and mobile is the key. Moving fast and having the cash or resources to move rapidly when presented with a great opportunity is the main plan. Repeating the process is the special sauce in the plan. Your forward momentum and creativity are paramount. Looking for motivated sellers and using creative ways of acquiring properties is always the smart move. Owner finance, refinance, short term private funding…etc. Secure the property, refine the property, and resell or hold…always keep the momentum moving forward.
💎War Chest: A few ways to build your cash reserves are by refinancing rental real estate and/or cashing out retirement plans (401K, Retirement Annuities, IRAs, etc.). Here are some tips on using both options to help you build your financial war chest for 2022:
💎Retirement Plans- some retirement plans allow you to withdraw funds. Weigh the pros and cons and employ this as part of your cashing out process. You can either borrow from yourself within your retirement fund or cash out. If you have an IRA, you can switch to a self-directed IRA. You can invest in real estate within the self-directed IRA. Keep in mind that there may be tax considerations and certain guidelines you must adhere to. Make sure you reach out to your accountant so you can get the full picture before you make your move.
💎Real Estate Refinance/Cash-Out- this is a balancing act. You need to make sure you make the right choice when using this technique. Here are a few types of loans to help you use the equity at your disposal.
- Rental Loans Programs
- Bridge Loan Programs
- SFH, Multi-Family and Commercial Refinance Programs
- SFH, Multi-Family and Commercial Cash-Out Programs
☛Tips on refinancing and cashing out.
- Take 50-65% LTV- We call this strategy “Milking your portfolio.” Like a farmer milking a cow to build his farming revenue, you tap into your equity to increase your share of new opportunities. Every few years you extract funds from equity and reinvest them to build your portfolio. This technique is a good way to build your investment holdings using your own resources. This is how we built our multi-state rental portfolio from SFH to multi-family and eventually to commercial. Our natural instinct is to max out our equity to buy as much as we can. It’s the “greed is good” formula and it can take you down if you don’t tame the beast. If you recall the classic 1987 movie Wall Street, where Gordon Gekko a wealthy, unscrupulous corporate radar played by Michael Douglas gives his “Greed is Good” speech to a board panel of suits in a shareholders meeting. The movie by Oliver Stone inadvertently shows the villain as a hero instead of a foe despite Gekko’s demise at the end. Naturally, this fiery speech inspired young people to become brokers and attorneys by the boatloads, but it was not the intention of Stone when he created this tale. In this case, with your investment strategy, we suggest you utilize a 50-65% loan to value approach when refinancing. Anything else can strain your assets and send you off on a negative path. Here are a few other things to consider.
- Watch your cash flow and numbers – make sure you don’t overextend yourself by getting into a loan that is toxic. If the numbers don’t match, avoid a mistake that can take down your portfolio.
- Build your cash reserves- you should have 3-6 months’ payments in the bank as a cushion. Living hand to mouth is tough and building a business in that style is stressful and counterproductive. Lack of cash and poor planning is the reason for the 95% failure rate among investors. So, build your cash reserves then you play. So, once you have that cash reserve intact, you are ready to start planning for growth.
- Conserve your cash reserves- once you pool your cash together, conserve it. Use OPM (other people’s money) to build your financial resources. Take a short-term loan (3-12 months) to acquire and rehab a rental property to hold or flip. Here is an example of what I mean.
- Subject Property: Duplex, Off-market, motivated seller
- As is Value: $225,000
- Purchase Price: $210,000
- 90% Purchase Price = $189,000
- Rehab: $50,000 (Rehab 100% Paid)
- After Repair Value: $395,500
- Loan Amount in Total = $239,000 (PP $189K + $50K Rehab) @ 9% for 12 months, 3 Months Pre Payment-Penalty
- Deposit $21,000 plus closing cost (closing cost can sometimes be added to the loan)
- Rehab Period Scheduled 6 Months- finished in 3 months
- REFINANCE IN 3 MONTHS @ 65% ARV ($395,500) = $257,075
- New 30-year loan $257,075 @ 5.25%
- A few tips:
- Stick to the 50-65% LTV, try to get back what you put into the deal so you can build on your cash pool.
- If you can extract $5-$10K on the refinance strategy with each project, do it. Repeat the process and keep the momentum going.
Some investors hold back because of the higher interest rates for short term loans. I say that it is the price you pay to build your portfolio and keep your investment momentum going. Sure, it’s good to look at the big picture, and scrutinize the deal, but get the deal before you lose it. Recently, I worked with an investor and using this fix and flip/hold technique he was able to add an extra $9000 in rental income and build $165,500 in cash reserves on 3 duplexes during the course of 4 months. By the end of 2022, he will double his portfolio and his rental income if he continues this strategy.
Don’t miss out on the next wave of foreclosures. Despite the competitive market across the country, savvy investors will be able to plunge into the market and find great deals. Please book a call for a free strategy call. If you are ready to take your investing to the next level, we can help. Let ROGP Capital help you build your portfolio using our private capital resources.