From Pizzas to Properties – Don’t Reinvent the Wheel
“Ain’t gonna beg you to stay.
Ain’t gotta ask you what’s wrong.
Ain’t no reason running after something already gone!”
Joe was singing at the top of his lungs as we walked up and down the block passing out menus.
It was a beautiful autumn day in 2011, and the Luke Bryan song, Kiss Tomorrow Goodbye, was playing non-stop on the radio.
It was one of my favorite songs, but it was quickly becoming less so with every rendition of the chorus Joe belted.
Shortly after returning to school my sophomore year, I decided to pick up an off campus job at a pizzeria. On this particular day, I showed up during the lull before the dinner rush, and the owner sent Joe and I out to distribute menus.
“So look,” said Joe, as we climbed the steps onto a stranger's porch. “You roll it up like this and stick it between the doorknob and door jam.”
He quickly rolled a menu lengthwise - like a little kid playing pirate ship would roll a telescope - and dropped it along the doorknob.
The paper unrolled just enough to fill the void and stuck in the open space, primed to hit the owner’s foot when he opened the door, prompting pizza cravings, and increasing our orders tenfold!
“Got it?” Joe asked.
I nodded. “I think I can handle it.”
“Cool. You do this side of the street, I’ll do the other side, and we’ll meet back at my car when we’re done.”
And just like that, I was a marketing and content distribution expert – college is all about building those resume skills, right?
Don’t reinvent the wheel
Passing out menus can hardly be considered a skill, but it was a part of the job I needed to learn. Joe had done it plenty of times, so I shut my mouth and learned from him.
Could I have figured it out on my own?
Probably.
But most likely, I would’ve gone door to door dropping menus into mailboxes, which it turns out, is illegal. That approach could’ve landed my boss in trouble. And since shit rolls down hill, it would’ve affected me too.
While learning a proven process from an expert makes failure less likely, it doesn’t necessarily make success easier.
For every hundred menus passed out, we only received one or two orders.
How does this translate?
Disruption and first principles thinking can be great for innovation, competition, and building a successful business.But more often than not, you don’t need to re-invent the wheel.
You don’t need to put menus into mailboxes like an idiot. You can simply look to the person with experience and copy what he’s doing.
When my partner and I wanted to expand our real estate portfolio but didn’t have the necessary capital, we turned to a proven, repeatable strategy we learned from Bigger Pockets: a cash out refinance.
This strategy allowed us to access nearly 98% of the cash we used to buy a property less than two years prior.
Here’s how we did it
In June of 2017, our property manager brought us a deal he found through a connection. A local farmer and business man was selling his real estate portfolio to support his wife’s political campaign.He had one property left to sell.
He needed the cash, and he needed it quickly.
The property was a duplex grossing between $1,500 and $1,600 monthly.
The asking price: $45,000.
The deal had two slight drawbacks.
The seller wouldn’t talk on price – the property was priced to sell.
And it needed to be a cash deal – the seller needed the money fast, so there was no time to involve a lender.
We realized this was a great opportunity.We’d purchased a similar duplex three months earlier for $65,000. So we got our cash together and pulled the trigger on the deal.
We were under contract for another property at the same time, so I had to tap my 401k to fund my half.
Doing this deal meant we could only buy one property instead of the two or three properties leverage would allow us to buy.
It would stunt our growth initially, but everything we heard from the Bigger Pockets podcast told us it would pay off in the long run, as long as we could execute a cash out refinance.
We bought the house, closed quickly, and everyone was happy.
What is a cash out refinance?
A cash out refinance is when you replace an existing mortgage with a new mortgage, or in our case, take out a mortgage on a property that you own free and clear.
The purpose of the cash out refinance is to put all or most of your initial cash investment back into your pocket.
In order to recover your cash, you need to do one of two things:
Increase the value of the property through renovations; or
Buy a property that is under market value, so it appraises for higher than your purchase price.
We did the latter.
Seasoning period
According to our research, most banks won’t lend you money against a property you own until it has seasoned.
In real estate, seasoning is the period of time a bank requires you to own a property before they will lend against it.
The period varies depending on the bank,but it’s typically one year.
Finding financing
After eight or nine months passed, I started searching for banks that would let us do a cash out refinance.
As BiggerPockets mentioned, and I quickly found out, this process takes persistence.
Strike one
My first stop was to a regional bank in the area where our properties were located. I scheduled a meeting with the branch manager, showed up when he told me to, and found the branch locked.
Hundreds of miles from home, I wasn’t leaving without a meeting. I knocked on the door until he let me in.
I came prepared with a three-ring binder full of the following information:
The prior year financials for all our properties, along with year to date financial information.
Pictures of each property.
A one page write up on me and my partner. I summarized our education, employment (with salaries), real estate experience, and our investment goals and criteria (with specific figures).
A list with the name, phone number, and address of our team – property manager, accountant, attorney, real estate agent, insurance agent, and property inspector.
I slid a cover page in the front of the binder, put each page in a sheet protector, and separated the sections with tabs.
We only had four properties, but I wanted to look like we knew what the hell we were doing.
The banker was impressed with my organization and the way I presented myself – but he only spent about three seconds flipping through the binder.
Our prospects were looking good – until he realized neither me, my partner, nor our business had a physical presence in the area. It was a total deal breaker.
The bank didn’t lend to customers outside their geographic footprint.
Strike two
Next stop, another regional bank in the area – this one even smaller. I had an appointment with a lending manager at the bank, but when I arrived, she was on her lunch break.
The branch manager showed me to the lending manager’s office and assured me she would be in shortly.
After ten minutes scrolling my phone, I was greeted by the lending manager. As I stood up to shake her hand, I was overcome with extreme discomfort.
To my surprise and terror, the lending manager was the identical twin sister of a girl I had briefly dated years before.
I spent what felt like the longest meeting of my life squirming in my chair and trying to act professional.
When she told me she only handled residential lending, I took a card for the commercial lending manager and made a beeline for the parking lot.
I was zero for two.
Staying alive
After several failed meetings, I tried the cold call approach – over, and over, and over.
Finally, I connected with a branch manager at a local branch of a much larger regional bank. They specialized in commercial real estate lending, but this branch manager was kind enough to give a small fish a chance.
She turned out to be the most caring, competent,thorough, and professional banker I’ve ever worked with. Because of her, I would recommend the bank to anyone.
Closing the deal
By the time I found a bank willing to work with us, we were well past the seasoning period requirements.
We moved forward with the process, and the gracious bank manager coached me through every step.
Since our LLC was relatively new, we had to provide a ton of information:
Three years predictions of income and expenses for each property.
Tax, utility, and insurance bills from the past year.
Proof of personal income for me and my partner. And,
Many emails explaining the ins and outs of the above information.
After approval, we had to get an appraisal on the property.
This was the moment of truth – would the property appraise high enough to get all our cash back? Or was this all wasted time?
The appraisal came back at $55,000 – lower than we hoped but high enough to be worth it.
At a lending criterion of 80% loan to value, the bank would grant us a loan for $44,000. Just $1,000 shy of the price we paid for the house!
Getting the W…kind of
Through patience, persistence, and working a process we learned from those who had done it before us, we were able to essentially buy a duplex for $1,000.
We were about to recapture almost all our original investment, which we could use for down payments on two more duplexes.
A cash out refinance basically allowed us to get a cash flowing duplex for free!
But here’s where the story takes a strange twist.
Only a few days before we were set to close, we received an offer to buy all our investment properties as a package deal. As a result, we withdrew our loan application and never completed the cash out refi.
The other deal is still in the works, so I have to leave you in suspense.
Regardless of how it plays out, I’ll write about it.
I’ll either be sharing some actionable steps you can repeat or some major mistakes you should avoid – fingers crossed for the former.
