Before focusing on how I came across this deal specifically, I think it is extremely important to take a step back and look at why deals tend to flow to some investors while others struggle.

90% of my portfolio are within a 5 min drive of each other.

This didn’t happen by accident, when I finally decided to get serious about starting to accumulate cash flowing properties, I did analysis on where I could get the biggest bang for my buck.

There is no perfect algorithm for figuring out what type of properties you should buy and where, but several of the factors that I considered were:

-Cost of property compared to rent

-Driving distance to my house

-Areas where I felt safe

-What areas worked well for the veteran voucher program (HUD-VASH) I wanted to incorporate in my business model

-Where the type of property is that would be low maintenance and desirable from a rental standpoint (3 bedroom ranches built in the 60’s-70’s in decent neighborhoods)

I decided on two towns right next to each other that, in my mind, worked perfectly for what I was trying to do, which is buy property that needs to be rehabbed for a discount, rehab it, rent it to a veteran voucher holder, and then refinance my cash out of the property with cheap bank financing.

Once I decided on these two towns, the deal flow picked up substantially.

This seems counter intuitive.  Previously I had been doing flips and searching for deals in any suburb of Chicago.  You would think with an extremely broad search criteria (all Chicago suburbs), I would come a across much more deals than when I narrowed down the search to two towns right.

Wrong.

Here’s what happened.  When I became super specific about where I was buying and what I was doing.  Everyone around me (attorneys, agents, friends, neighbors, contractors, etc) could envision what I was looking for.  They knew specifically that if they came across a property in Hazel Crest or Country Club Hills that needed to be rehabbed, I was the guy to call.

Even my own marketing efforts became more specifically focused because I could envision the exact house I wanted to purchase rather than a general idea of what I was looking for.

We probably have all heard that the more specific your goal, the more likely you are to attain it.  Finding great cash flowing deals is no different.

I can’t tell you how many times I ask someone at a real estate event what they are looking to buy, and they tell me “any great deal.”  That is sort of the same as a business owner being asked what his business does and answering with “we do a lot of good stuff.”

The likelihood of a business owners driving new customers to their business with that response is almost zero, and the likelihood of a real estate investor driving new deal flow with that response is about the same.

People want to help you achieve your goal, but they have to be able to envision an easy path (that also benefits them) to help you get there.

How We Got The Deal – 2818 Lexington Dr, Hazel Crest, IL

This specific deal is a great example of how sharing exactly what I was doing with those around me led to a deal.

When working in real estate, you can’t help but surround yourself regularly with real estate agents.

Agents are like investors in that they typically specialize in a specific type of property, in a specific area.

However, agents still want to capitalize on opportunities or leads that come their way, even when it is not in their target zone.

This is why I like to always share what I’m doing and where I’m buying with agents who might be focused on areas where I’m not buying, so that inevitably when a seller pops up in my hyper-specific geography they know that I’m going to be eager to purchase.

This deal worked out exactly that way.  A husband and wife realtor team that I am friends with was focused on a high end suburb neighboring the area where I invest.

One of their clients referred an elderly relative to my agent friends,  This seller had a house that needed a lot of work in Hazel Crest (one of my two target towns) and wanted to sell it quickly.

After seeing the house (and the 40 years of stuff that had accumulated in it) they realized it made more sense as a cash off market deal, than as a listing on the MLS so they called me.

I listened to what the seller was looking for, which was a quick close and an as-is sale with all of the junk left behind and repairs still needing to be made.

After my walk through, I calculated my repair costs, and what the property should sell for, and made an offer that day with a quick closing, since I knew that was what was important to them.

One of the main keys to all of this is to pay attention to what is important to the other party and do whatever you can to provide it in spades.

The Numbers

$30,000 – Purchase Price

$43,000 – Cleanout and Rehab

$5,000 – Closing and carry costs during rehab

$78,000 – Total Costs

$105,000 – Appraised Value After Rehab

$1,650 – Monthly Rent

It’s important to note that it is crucial to leave a buffer between your total costs and the appraised value.  Many cash flow investors just focus on the cashflow and overlook the amount of equity that will be in the property after the rehab.  This can get you into trouble very quickly.

There is no point in going through the blood, sweat, and tears (and risk) of rehabbing a property if you won’t have equity in it afterward.  You might as well purchase a fully rehabbed property off of the MLS at market value and rent it out immediately, rather than to go through the pain of rehabbing.  There are lots of them out there.

The tradeoff of buying a turn key property is that you don’t get that equity spread between the all in price of the rehab project and the value of the property, but you avoid the pain of the rehab process by buying something completely rehabbed for you. (for more on this see my article on building margin)

How We Funded the Deal

If you present a deal like this in a logical format (ie pictures, deal numbers, timeline, scope of work, listing if there is one, etc) to anyone who likes to make a high rate of return on their money, it is pretty much a no brainer investment for them (assuming you are a good trustworthy person).

This is how we fund almost all of our deals initially.

We provide a high rate of return secured by an undervalued asset to private individuals (mostly friends and family) on money that had been sitting in mutual funds or a 401k previously.

Each day the money is in the deal it is making a high fixed interest, and then when we refinance into bank funding, the principle and interest is paid back or moved into a new deal.

Here is a link to the report from the appraisal that the bank ordered on this property after we completed the rehab.  I think it’s important to understand how an appraiser values a residential property based on the comps in the area so you go into a project knowing how they will value it when you are done with your repairs.

We use a local community bank  that likes to lend on small commercial deals (again, finding what the other party values and providing it).

Once we are done with 4 or 5 property rehabs, we send over the information on the properties to the bank, and the bank orders appraisals on each.  They then loan us 75% of the appraised value (which is typically more than all the cash we have invested in the deal) at a low interest rate (typically half of what our private money interest is) on one commercial loan that covers all 4 or 5 properties.

At that point we have pulled out 100% of our initial investment and continue to have a few hundred dollars of cash flow on each property going forward.

Which is exactly what we did in this situation!

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