How to use the investor "3 step" to build wealth blog by Larry Arth for Personal Real Estate Investor MagazineI received an interesting call some time back from a real estate investor who was vacationing here in sunny Florida.

Knowing I lived in Florida, he asked how far I was from Clearwater beach and if it was possible to meet for coffee? I never turn away a reason to go to the beach or to talk real estate investment over a cup of coffee.

When you join my two interests, it is a great meet up. As I lived just 15 minutes from his beachfront hotel we arranged to meet.

We had a great conversation that covered a long-term real estate investment plan. We discussed cash flow, equity growth, timing, down payments and all the usual investment topics. He was interested in several things from his investments, and was purposeful in thinking his investment strategies up front.

He had a long-term investment strategy which contained at least 10 properties for an initial startup portfolio. Once he got that under control, then he would have assets and leverage to morph these real estate investments into any size portfolio he chose.

  • He wanted some of those properties to be in Florida as he had a touch of lifestyle investing in his blood. He loved to vacation in Florida so having investment property that he could come and check on while taking advantage of some tax deductions was appealing to him.
  • He wanted good, solid and sustainable cash flow so once he purchased the properties and turned them over to property management so they would be self-sufficient.
  • He of course wanted properties that could deliver good equity growth.

We had a number of conversations following our initial meeting as we worked to fulfill his objectives. Since this investor was from Canada, one of the larger obstacles was to build a portfolio with limited access to financing for a foreign investor. Lenders like to see you (especially foreigners) have assets and cash flow before they want to lend to you.

So his mission was to use cash he had available to purchase investment properties to show assets and cash flow to lenders. He could afford to buy two to four properties with cash depending on price points.

So the initial mission was to get 10 properties, for starters, from the cash he had access to. The strategy that we concluded (and put into play) that would best fit his end game was:

Step One – Cash Flow

how to use the investor "3 step" to build wealth in real estate investing blog by Larry Arth for Personal Real Estate Investor MagazinePurchase the first few properties with cash and focus on cash flow.

This would allow for the properties to be self-sustaining and the cash flow, since he had no mortgage payments, would build up quickly and get to the six month reserve recommend for each property.

After discussing a number of markets throughout the country we determined the market that could provide the low-entry price position he was looking for, along with the sustainability of the ROI and anticipated growth, would be Philadelphia.

He purchased three single-family homes for an average acquisition price of $75,000. These are older properties which are literally stripped down to the studs and renovated with new electric, plumbing and heating, ventilation and air conditioning (HVAC), kitchens, baths roofs, etc.

So the cash flow is very sustainable. With three of these rented on average for $900 per month he averages $650 monthly in positive cash flow. $650 x 3 = $1950 monthly or$23,400 annually. He also is in the process of purchasing a three-unit apartment building that will provide similar returns to the three houses. Now he has doubled this cash flow closer to $46,000 per year.

Step Two – Equity Building

Using assets already obtained in the U.S, this Canadian investor now found it easier to find financing. He leveraged the assets which were purchased under market value giving him immediate equity, along with any future appreciation.

Putting loans on these properties will now allow him to replenish much of his initial investment capital. We anticipate based on many lender conversations, it will look something like this: The initial investment per house was $75,000 with a value closer to $83,000. At a conservative appreciation rate per year of three percent, next year value will be closer to $85,000. When financing 60 percent of this, he can maintain 40 percent equity and cash out about $51,000 x 3 properties which equals $153,000. Using the same principle, he can cash out about $117,000 from his three-unit apartment building. So the combined cash he will have to work with will be around $270,000.

The strategy here will be to focus on properties that are stronger suited for equity growth. These equity growth properties tend to be more expensive on the front-end as he will be buying a little higher-end property which tends to have less cash flow.

The benefit here is in the more rapid growth of equity. This equity growth is where wealth is created. He will be targeting properties that represent the highest and most sought after property in the country – the three bedroom, two-bath, two-car garage home.

These properties will be in a location that represents the area’s median home price and within the best emerging market. The exit strategy of course will be to buy the highly sought after property that the full price retail buyer will ultimately want to purchase. This allows for maximum price with the most ease of sale.

Step Three: Repeat

This process can be repeated to not only get him to his 10 properties. It can be duplicated over and over allowing you to build a portfolio as large as you like it to be.

Visit Larry’s site here.

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  • Larry Arth

    Larry Arth is the founder and CEO of Equity Builders Group, a Florida-based real estate investment group. A 36-year veteran of real estate investing, Arth also is an international consultant and speaker who each year assists hundreds of investors, both foreign and domestic, in realizing their investment potential. He analyzes locations for economic strength and for the largest and most sustainable returns and, most importantly, sustainable turnkey investment. His focus is offering turnkey investments to the passive investor. Visit his website at www.howtobuyusarealestate.com.

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