- Travis Hanson secured a guardian line of credit so he could take advantage of a market correction.
- He then buys a house and repairs it with the loan.
- Once the house value is increased, he requests a mortgage for the after repair value.
Travis Hanson started investing in real estate in 2009, while still a law student in college. This was in the midst of the financial crisis that had started a year earlier, and house prices had fallen drastically.
Even after becoming a lawyer, he continued to expand his real estate portfolio because of the cash flow it continued to generate. He has now amassed more than 109 properties with about 150 rental units, according to county records seen by Insider. He also owns many real estate businesses, including a property management company, a brokerage firm, and an educational platform called The Real Estate Retreat Network, which offers in-person networking events and one-on-one coaching.
As high mortgage rates and inflation push many buyers to the sidelines, he expects an even bigger buying opportunity than that of 2008. He is heading for a correction that could see prices drop by as much as 20% in some areas.
Median home prices in the US fell 19% from their peak in Q1 2007 through their low point two years later, according to Census Bureau data. Although the picture is not nearly as bleak nationally and there is not yet a crisis of 2008 proportions, home sales are declining nationally, and prices are falling in several cities that have seen rapid price growth as a result of the pandemic.
Seizing this opportunistic moment, Hanson assured a guideline credit for $5 million, according to a screenshot of an email from his bank. It is a line of credit (LOC) that is approved by the bank but is not openly available to the borrower until a specific event, often triggered by a request for funding from the borrower.
“So that’s what I’ve already set up just because I think there’s going to be a massive event,” Hanson said.
His advice for those starting out
Most people don’t have a ton of cash readily available in the bank. That’s why Hanson recommends considering a line of credit (LOC). It’s a loan anyone can apply for at their bank, as long as they have a decent credit score, he noted. Otherwise, if you have property, it can be put as collateral against the loan. Some banks may require you to keep 10% of the loan amount in cash, he added.
There are different types of LOCs, including an open-end or revolving line of credit, which allows the borrower to make withdrawals at any time and repay them during the life of the loan. There is also closed credit, which the bank allows for a one-time payment that must be repaid. Finally, you can consider a home equity line of credit (HELOC), which uses your property as collateral against the loan.
Hanson uses LOCs when its own cash is already tied up. This allows him to make a cash offer on a home. He also uses it to cover rehabilitation costs. However, this type of loan can often have a higher interest rate than a conventional mortgage, so he plans to repay the loan once the property is repaired.
He repairs the properties that have been purchased to increase their value. This allows him to return to the bank and apply for a mortgage on the house. A third-party appraisal will then provide evidence of the home’s new value, enabling the bank to grant him 80% of the post-repair value (APR).
The property itself is what qualifies Hanson for the mortgage, as long as the rent collected is higher than the principal, interest, taxes and insurance (PITI), he noted. Often Hanson will pre-let the property as proof to the bank that the rent is higher than the PITI. However, using rental rates of similar homes in the area is another way to show a bank how much rent it can collect.
If the process is carried out correctly, Hanson now owns a new property without using any of his own money. The rent then pays for the mortgage on the new house.
There are two big mistakes that can turn a great deal into a really bad deal, he noted. The biggest risk is not knowing your final value and you end up with a low appraisal. The second biggest risk is if you don’t estimate your rehabilitation correctly, he added.
That’s why it’s important to know the market you’re in very well, he said. If you’re just starting out, he recommends hiring a knowledgeable local real estate agent.
Also, use a PITI calculator to determine what your monthly costs will be. It can be found on Google. To determine rental rates, Hanson uses AppFolio, a property management software. But if you’re in a larger market like a big city, sites like Zillow can also be reliable.
When it comes to the properties he buys, Hanson looks for houses that look like they’re a big mess and need fixing, he said. And since he can offer a seller cash from the loan he’s secured, he can often negotiate a lot.
“I’m looking for the ugliest house on the block so I can buy it cheap,” Hanson said. “A lot of those homeowners, the house is empty because they can’t sell it because of how it looks.”
To find these homes, he uses an app called Driving For Dollars from the Deal machine, which is an app you can use while driving around neighborhoods. If you see a dilapidated house, you can take a picture of it, he said. The app has ownership data and it geo-tracks the picture. Hanson then uses the app to send a postcard to the owner of record, offering to buy the house.
If it looks like someone lives there, he will look up the address through property management companies and determine if there is a lease on the house. If not, it usually means it is owner occupied.
In that case, he will often knock on the door himself.