We have to start somewhere. As with any new business, you can’t expect to make money on day 1, and your mortgage isn’t going to pay itself.
For most of us in real estate, we need to hold full-time jobs while we build our portfolio. In this article, I’ll continue to discuss the various ways to generate side income through real estate, particularly $40k without quitting your job using my “PULR” system.
Joe McCall who runs the Real Estate Investing Mastery Podcast has a great saying: “The less you do, the more you make.”
The PULR system can increase your cash flow and net worth without taking a substantial amount of time or money.
Use the “PULR” System?
PULR stands for purchase, update, lease, refinance.
This system is used best for single-family and small multifamily properties. It involves buying them, making some minor updates, renting them out, refinancing them, and repeating.
The first step is to purchase a property (duh!). The most important part of this strategy is that you buy at a steep discount. Keep this motto in mind: Buy great deals, not good deals.
Buy great deals, not good deals.
It’s easy to comb the MLS and buy a property slightly under asking price.
It’s completely different buying a property at a 20% to 40% discount to fair value. For example, if homes in a neighborhood generally sell for $100,000, assuming $10,000 in repairs, your maximum offer should be around $70,000. Note: always increase your construction budget by 10% to allow for unexpected contingencies.
You would ideally buy properties with a private or hard-money lender, and try to use 100% of their money for the purchase and renovations.
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Most investors will tell you that you the best return on investment (ROI) you can get is with a bucket of paint. I agree with that statement. And ROI is even better if you buy the paint at a discount! That’s the mindset to have.
You should also consider new flooring. Hardwood floors are practically essential if you plan to own the rental property for more than two years. If you choose carpet, you might need to replace it as often as every two years.
This is where the proverbial bleeding stops, and you have revenue coming to you.
If you bought a property at a discount and made some upgrades and updates, now is not the time to start skimping.
You might wish to consider first offering a three-month lease, and if everything works out, then offer a 12-month lease. This way, you make sure the tenant pays on time and that everybody gets along. If not, no big deal – they move out after three months.
If it does work out, you essentially have a lease for 15 months—the initial three-month lease plus the follow-up 12-month lease.
You never regret waiting for a high quality tenant.
Why would you want to refinance? You just bought the place?
With the upgrades and updates, and cash-flow from the tenant, there is a high probability that you have some substantial equity in this property.
In my opinion, you should only refinance if you want to grow your rental business fast. If you want moderate growth, then simply make this a PUL strategy (leaving out the R). You also should be extremely careful about doing cash-out refinances. You could lose everything if the market crashes or takes a downturn.
The benefit of refinancing, however, is that cash (and cash-flow) is king.
Liquidity is one of the most under-appreciated parts of real estate investing.
Let’s assume you bought a property for $118,000 and invested $10,000 in upgrades. After a year, the property appraises for $185,000. (Yes, this can happen!)
You can use this strategy after buying properties using private money and then refinancing them with bank money. You can also use this strategy with any kind of combination of purchasing strategies, such as using hard money to buy and then refinancing with banks.
A private lender is usually more than happy to put up 100% of the funds needed if ultimately they will be paid back in the short-term and/or the property is in a highly desirable area. That way, they figure it will rent out easily.
After a year, you go to the bank and get a cash-out refinance loan. Here’s how it works: 80% of $185,0000 = $148,000. You borrowed $128,000 for the purchase and renovations. Therefore, $20,000 is left over for you to put in your real estate account.
Let’s recap. In a year, you started with zero, borrowed the full amount to purchase and rehab, and then did a cash-out refinance.
At the end of year one, you have a rental property that is cash flowing nicely and $20,000 in liquidity.
I titled this article: “How to Make an Extra 40k in Real Estate” because it’s easy to do two of these deals a year.
Just remember these key points:
- Buy properties at a substantial discount.
- Do a cash-out refinance to free up liquidity.
What Do You Do After This?
Answer: You do it again!
If you do the example deal above twice a year for five years, which is completely realistic, you will have 10 rental properties and $200,000 in cash. This doesn’t take into consideration all the extra cash you will have from the profit you make from the rental properties themselves.
This strategy isn’t complicated, but it increases your net worth, liquidity, and cash-flow – a “WIN-WIN-WIN”
Have you done this strategy? Let me know in the comments!