How to Invest in Real Estate, From an Investor Who Started With $5,000 - Business Insider

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Matthew Tortoriello is the cofounder of YellowBrick Management and one-half of the social-media brand Two Guys Take on Real Estate with his business partner, Kevin Shippee.
He’s co-owned more than 542 rental units, 207 of which are cash flowing, property records viewed by Insider show.
But the path to his portfolio wasn’t easy. He bought his first property in 2008 when he was cash-strapped. Tortoriello, Shippee, and another investor each pitched in $5,000 for a down payment on a two-family home that cost $75,000 in Springfield, Massachusetts.
They used a local hard-money lender — securing a nontraditional loan backed by property — to nail down the funds for the remainder of the property and its required repairs. As they were coming in with little money and experience, their movements had to be tight and calculated. One small mistake could have put them out of business.
Even while working with a hard-money lender, they had to take incremental steps to qualify for each part of the loan, including demonstrating the value of the home once it was rehabbed. It also meant accessing money on a draw schedule: Each part of the construction process required the lender’s confirmation, followed by the release of the next amount.
When all was said and done, the property was worth about $160,000, allowing them to pay off the loan, pull out some profits, and refinance the property based on 80% of its value.
“We then basically got the $15,000 back plus an extra $30,000 tax-free because it’s actually a loan to the property,” Tortoriello said.
“And then the tenants were paying us rent, covered the mortgage and then some,” he continued. “And so we started with $15,000, now we had $45,000, and then rolled into the next project. And we did that a few times and had hundreds of thousands of dollars.”
Tortoriello told Insider he mainly used the BRRRR method: buy, rehab, rent, refinance and repeat.
First, to be successful, you’ll need to buy well below value. This means finding off-market deals or talking to wholesalers. Landing a great deal means a greater chance of having larger profit margins and a cash cushion after the first sale.
Second, you’ll want to overestimate your rehab budget. Tortoriello said most people underestimate the number of repairs a house needs and the cost of that work.
Getting your budget right means knowing the costs of products and materials. Tortoriello said the prices of some materials had risen in just the past three months, so an investor should keep up to date on rates and make calls to see if certain materials can be secured.
If you’re using a hard-money loan, you’ll want to keep the rehab period as short as possible, because the terms are usually tied to high-interest rates.
Third, make sure you’re accurately predicting the property’s after-repair value, because that’s what you’re banking on. Tortoriello recommends seeking input from knowledgeable local real-estate agents or appraisers. An appraiser can even give you insight into which upgrades could increase your property value the most.
Fourth, you’ll want to end up with a property with continual cash flow, because the mortgage and monthly expenses will need to be covered with rental income.
“If you don’t have the experience being a landlord, I would look at finding a knowledgeable property-management company, someone who’s had a good amount of experience working with evictions, handling tenants, and doing good maintenance work,” Tortoriello said.
Finally, for the first project, select a property near you — this way you can track the progress of repairs and oversee the contractors to ensure they’re on schedule.
Tortoriello said one of the biggest mistakes he made was purchasing a home more than two hours away. This meant he was able to get to the property only once or twice a month to oversee the rehab process.
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