The long story of how I got started

It all started with a layoff... Not mine, but a co-worker. After being gone for a couple of months, this co-worker stopped by the office to visit. I heard him talking to the person sitting in the cube across the aisle from mine one morning. He said he was on his way to a foreclosure auction. My ears perked up! I had been reading the richdad.com website for about a year at this point and had read all the Rich Dad books. I quickly asked my friend out to lunch to find out more.

Turns out, he was buying properties, fixing them, and renting some, selling others. At the time I had lunch, he had 12 properties rented and had started a business flipping houses. I told him I was interested in getting a rental as soon as I had some financing set up. As he explained to me, the way he went about this was to buy a house below market value using a hard money lender and then do a cash-out refinance with a bank at market value. This should allow the return of most of your investment. The hard money lender he used required 20% down and 1 month's interest up front. The loan was at 18% and payments were interest only. I could use the same guy he did.

I knew I wanted to get a rental property, but the problem, even using this method, was getting the 20% down. What I decided to do was open a home equity line of credit (HELOC) on my residence. I had owned my house for a couple years and it had appreciated a good amount. So I called my bank and got a HELOC for $20K. (I asked for $25K, but they wouldn’t go that high.)

The next step, in my mind, was to form an LLC. This was the entity I was going to use to collect rents. I contacted my CPA, told her what I was planning on doing, and she got all the paperwork going to create the LLC. It cost me $800. Once that was done, I opened a business checking account under the LLC’s name and I was read to go.

All of these steps took a couple of months and when they were completed, I called my friend again. It just so happened that he had a property he just bought and was starting to fix up. This was a 3 bedroom, 2 bath house built in 1993. I went out to look at it.

Wow.. What a mess. I was a bit shocked to see the condition of the house – there were huge holes in doors, trash was everywhere, walls were filthy, light fixtures were missing, the backyard was overgrown with weeds, broken furniture was everywhere... Right then, I had some doubts about what I was getting into. However, the handyman my friend had hired was already working on the place and that was encouraging. The house had a huge backyard, but it backed up to a major street. It wasn’t too noisy though.

I decided to go through with the purchase. It would cost me $98K for the house, which had a market value of about $120K, plus a $1,346 finder’s fee to my friend. (I can’t remember why such an odd amount.) The 20% down payment, plus loan origination fee, plus first month’s interest that I had to pay to the hard money lender came to just under $23K. Since my HELOC was only for $20K, I used some cash I had saved plus a cash advance on my credit card to cover the rest. (I knew I still had fix up costs, so I didn’t want to put all my cash towards this.)

So I made a couple trips to the bank – first to the bank that had my HELOC and I drew against that. Got a cashier’s check and went to my LLC’s bank and deposited it. They wanted to put a hold on it for 14 days, which I could have, since I had to pay really quickly. I explained that the reason I got a cashier’s check was so that there would not be a hold on it. After the teller consulted with the branch manager, they agreed to not put a hold on the check.

The next day, I met my friend at my office. He had a bunch of paperwork for me to sign. The way this worked was the hard money lender was my “bank” and I was buying the house using him as the mortgage holder. After signing some papers, we went into escrow. I took several trips to the bank to get stuff notarized, but finally everything was done and I owned the house.

Which meant I had an 18% loan I had to pay, plus I still had to pay the guy fixing the place up. Plus I had to find a renter. Plus I had to refinance the loan to get rid of that high interest rate.

I got the cash out refinancing going immediately by calling a mortgage broker. I ended up getting a 30 year fixed rate. In retrospect, this was not the way to go, but at the time, it was what I was most comfortable with. Adjustable rate mortgages scared me. I already knew I wanted to rent the place out on a lease with an option to purchase (a “lease option” or “lease purchase”) for a number of reasons: I would get another chunk of cash (the option fee) when the tenant moved in and I could also have the tenant be responsible for most of the maintenance, since theoretically, he would be buying the place. I rolled all the loan costs into the loan, so I ended up with a $103K mortgage. My payments were around $950. I figured I could rent the place for $1100. Only $150 a month cashflow, but it was a start and I didn’t think that was too bad for my first try. After all the loan and escrow costs, I ended up getting about $18K back from the refinance, which I used to pay down my HELOC. At this point, I had the property for about $6,000 ($23K less $18K plus about $1K for a bunch of miscellaneous expenses). Nice!

I had been running an ad in the paper for two weeks looking for a tenant. I got a couple of phone calls, but nothing ever came of them. I tried several of the things mentioned on the richdad.com boards – I left flyers and applications at the house, I posted For Rent notices on the community bulletin boards at the local grocery stores, and put up signs. (Unfortunately, I discovered the city had an anti-sign ordinance, so the signs got taken down within a day or two of my putting them up.) So I was starting to get worried. My first mortgage payment was coming due and I had no tenant yet.

As anyone who has ever bought a house knows, as soon as your mortgage is recorded, you start getting all kinds of advertisements from real estate agents you obtained your name and address from the publicly recorded mortgage docs. I grabbed one of the postcards and called the agent. We met at the house and I told her what I wanted to do. She listed the property and within 1 week, I had a tenant!

The details were all handled through an escrow company – they collected the rent, paid my mortgage, and sent me what was left. They also collected the $3000 option fee plus $1000 in earnest money for the purchase, and sent that on to me. I had my first real passive income!

Coming up next – I refinance to get a higher cashflow.