- A 20-year veteran real estate investor anticipates a correction in the housing market.
- Not wanting to miss a potentially large buying opportunity, he refinanced two major operations.
- He now has a “huge cash stock” and is eagerly waiting for the right deals to come in.
By the time the last major bubble in the US housing market began to collapse in 2007, one New Hampshire real estate investor had slowly but surely built up his portfolio of up to eight units.
Matt, who prefers to go to “The Lumberjack Landlord” for privacy reasons and whose identity is known to Insider, told Insider that his growing real estate business, which he started in the early 2000s, has hardly survived the
recession
That followed the great crash in the housing market.
At the time, many tenants found themselves unable to pay the rent, which affected his cash flow and made it difficult for him to cover mortgages on his rental property.
“Times have been rough. I don’t have any money left. A lot of people have lost financially during the crash,” said Matt, who expects a housing market correction in 2022.
Matt wasn’t the only American to struggle at the time. But with the big change – in this case, lower home prices – comes a big opportunity.
“The bright side is that if you are prepared, you have greatly improved your financial situation by purchasing real estate,” Matt said of the situation.
There were tons of foreclosures and short sales during this period and it became an opportunity to get real estate at deep discounts. In some cases, Matt said, you can buy a property at half the last sale price during the peak market. However, he was unable to take advantage of this moment because he simply did not have the extra cash on hand to purchase some of these real estate.
In addition, it was very difficult to get a loan at that time, Matt explained. “With all the banks in big trouble, the last thing they wanted to do was dig deeper. They were still trying to assess if they could stay in business.”
Matt and his business survived the slump, however, and eventually began to see returns from his portfolio. By 2016, after expanding further, he said, his rental income was matching the salary he earned from his software job. Today, his total rental income of more than 100 units has crossed six figures a month, which is confirmed by Insider.
New Hampshire real estate investor “The Lumberjack Landlord” and his family died.
Courtesy of Matt and Ashley
Matt doesn’t want to miss another big potential buying opportunity, which is why he’s done two major refinancings in his portfolio in the past 12 months.
Cash refinancing involves taking out a completely new loan for a property and then keeping a portion of your home ownership in cash. However, when you do, you’re hedging a bet that you’ve built ownership into your property through things like repairs and upgrades and paying the principal on your mortgage. Oftentimes, homeowners will offer a cash loan to help finance a renovation, purchase a new car, pay college fees, or other major expenses.
Note that the cash you receive isn’t income – it’s the equity you’ve built into the property. It’s just another mortgage that you removed from your own property, and in many cases, the homeowner starts a 30-year or 20-year term in the former. Also note that refinancing isn’t free: Expect to pay 3% to 6% of your principal in closing costs, according to the Federal Reserve.
Matt gives an example of a duplex he bought for $180,000 in 2012. He invested about $45,000 working in it, which means he was inside it for $225,000. Recently, the property was valued at $560,000. As a general rule, it is not recommended to withdraw more than 80% of the value of your home in cash. By doing so, the property owner runs the risk of excessive leverage on his assets. And during an economic downturn, those who are over-indebted can find themselves underwater on a loan — tied up in a mortgage or a loan of more than the value of the property.
In Matt’s case, he’s comfortable with a 70% loan-to-value ratio, which means he keeps a 30% stake in the newly appraised property and then lends the remaining amount in the form of a new mortgage. In this case, that means Matt could borrow upwards of $168,000 (30% of $560,000). After subtracting what was owed on the previous mortgage principal, Matt can get the rest of the loan in cash.
“You take $560,000 minus $168,000, so it’s down to about $392,000,” he explained, adding, “Because I paid off the 10-year mortgage, I only owed $150,000, so the bank writes me a check for the difference between 392 $1000 and $150,000, so I get a check for only $242K to refinance my real estate.”
Again, this money is not income, but what he can do with it is buy more real estate. And he has a great deal of buying power with 242 thousand dollars. “If I want to cut 25%, that means I can find a million dollar property.” If he’s smart about what he’s buying, this is an opportunity to improve his cash flow even further.
His first major refinancing was in July 2021. He said he pulled seven figures, reinvested them before January of 2022, and “turned them into other $4-5 million in other assets.” His thought process was: “Asset values are great. [Interest] Fantastic rates. Let’s do the first draw.”
His second refinancing took place in March 2022. While refinancing works twice a year in Matt’s case, it doesn’t necessarily make sense for the average individual homeowner due to the closing costs that come with the process.
“Now is the time to grab as much money as possible from these assets, and then provide liquidity if the market corrects aggressively,” he said of the second refinancing. “I don’t think it will be a 50% correction because we don’t have the bad loan structures that we had in the Great Recession, but it could be a 10%-20% drop in rates.”
He said he now has a “huge cash stock” and is eagerly waiting for the right deals to be concluded.
I don’t think it will be a 50% correction because we don’t have the bad loan structures that we had in the Great Recession, but it could be a 10%-20% drop in rates.The owner of the lumberjack died
Matt is looking for nothing less than great deals. He explained that to understand what a great thing is, you have to understand what every other deal is. For example, if your market’s typical rate of return is 6%, the “good deal” is 8%, he said, and the “big deal” is 10% or more.
“I will not do a deal in order to reach an agreement,” he said. “My only goal is to make sure my portfolio is efficient and the cash flow is good. I don’t have to do 10 trades a year. I can make a trade or two. It’s all about making sure I call the right deal the one that will give me the best return on my capital.”
