I Sold All My Rentals to Become a Hard Money Lender

If you had asked me five years ago whether or not I’d be selling all my rental properties, I would’ve called you crazy. But hindsight is always 20/20, right?

Like many young and aspiring real estate investors, I had a plan. All I wanted was to replace my 9-5 salary entirely with passive income (plus a little extra padding on top).

So I did the math. “Okay, great. If I’m netting $250 per door after expenses, then I can work backwards from that. $10,000 per month divided by $250 per door is only 40 doors. Great. I’m at 13 doors now, so I only need seven more 4-plexes and I’ll reach my goal.”

I had all the spreadsheets. I had all the projections. I knew exactly how much capital I would need and exactly when I would hit my goal of 40 doors.

Or so I thought. I’m getting ahead of myself, though. Let’s rewind a bit to 2016.

Our First Rental

 

In 2016, my wife and I were newly married. Before meeting, we each had a bit of real estate experience, as we were both individually home owners and rented out bedrooms to roommates. That’s part of what made me fall in love with her – we joke that we “fell in love at first interest rate.”

After getting married and seeing the combined benefits from our cashflow, we decided to continue growing our real estate empire. We purchased our first non-owner occupied rental (pictured above).

It was a cute little 3 bed, 1 bath house. The cherry on top was that there was also a mobile home trailer parked in the backyard that we could use as another unit. In other words, we got 2 doors for the price of one. We paid a whopping $93,000 for the house. Our payment was around $850/month for both units, and we were netting $800/month.

To this day, that was the best deal I’ve ever purchased. The cash-on-cash was insane – it was something like 140%.

Although very intimidating at the time, we were glad we made the decision to buy the property. Those rent checks just kept depositing month-after-month into our bank account.

The Domino Effect

With that success, it lit a fire underneath us. “This is easy!” we thought. “If we make $800/month from that property, let’s just keep buying more and more.” And that’s exactly what we did.

We bought this duplex, which added roughly $600/month to our net cash flow.

 

A couple months after that, we bought this four-plex. It added an additional $1200/month in net cash flow.

 

A Change in Direction

Before we knew it, we were up to 12 doors within 12 months. On top of that, we were bringing in around $2600/month in pure cash flow. We were feeling great.

You might think this is the part of the story where I talk about how everything came crumbling down, or that we were being too cocky and had to be humbled. I think my ego was definitely a little inflated, but luckily for us, nothing came crashing down. Everything was really smooth sailing at this point. We had great tenants, maintenance requests were under control, and it was all really manageable.

Because things were going so well, we obviously wanted to continue purchasing more properties. This posed a problem, however.

We were out of cash.

We’d burned through our savings, as they had all gone towards down payments on properties. Our HELOC was all but used up, meaning even if we *had* found another property to purchase, we wouldn’t have been able to afford another down payment.

Frustrated by our inability to continue, I reached out to a close friend/mentor who had 100+ doors of real estate and asked how we could continue growing. Looking back, it just makes me laugh, but at the time his words felt very profound to me: “Have you thought about flipping?”

Have you thought about flipping?

Call us Chip and Joanna Gaines

The general advice my friend gave us was this: “For every 3-4 properties that you flip, try and keep at least one of them.” The idea behind this was to sell off the older properties that you don’t want to hang on to long-term, and keep the newer properties as rentals. This would allow us to get some quick capital, but also still grow the rental empire.

We began searching for our first flip project. Before too long, a deal came across my inbox and we decided to pull the trigger.

 

It was a little 1200 sq. ft single-level property that, for the most part, was all cosmetic. Over the next 6 weeks, we spent nights and weekends renovating it (we weren’t smart enough to hire anyone to help us. But it’s not like we had the money for that, anyway).

After hundreds of hours of work, we finished the project and listed it on the market. Although it sat a little longer than anticipated, we walked away with $26,000 in net profit.

Boom, baby. We were back in business.

That first project was the catalyst that caused us to fix and flip over 60 properties over the next five years. Out of those 60 properties, we’d decided to hang on to 35 total units. Some of them didn’t produce adequate cash flow, so we sold those ones and took the quick cash and moved onto the next property.

A Funny Realization

It’s strange to think that “past me” would be so proud of myself now for hitting that goal. We did eventually surpass the $10,000/month benchmark, which was the initial target. But it wasn’t exciting. It wasn’t euphoric.

It’s almost like hiking. You have this vision in your head of what the top is going to look like. Just as you cross that hill, you look down at the view before you, and to your surprise, it’s just kind of a “meh” moment. It’s not ugly — it’s just not breathtaking, either. “I hiked all this way for that?”

I’m not complaining about the income — that was nice. But it’s what that income *meant*.

It now meant that I was on the hook for 35 units and 35 tenants and 35 toilets.

You’re probably thinking, “Why didn’t you just hire a property manager? They could’ve taken care of everything for you.” I’d had that suggestion given to me many times. But for me, at least, it never truly put my mind at ease. Sure, they took care of the day-to-day. They place new tenants. They deal with the maintenance requests. But at the end of the day, having a property manager wouldn’t have resolved the stress of owning those 35 units.

Here’s an example:

This past winter, we had a huge snowfall. More snow than we’ve had in the last ten years. Everywhere you went, snow was piled up three to four feet high on either side of you. Then, around March or April, we suddenly had a warm front roll in and all of that snow started quickly melting.

Left and right, people were getting reports of basements flooding. Stores all around us were out of sandbags due to demand. My parents’ basement flooded right along with many of our neighbors.

Property Managers are reactive, not proactive.

Statistically speaking, with 35 units, I’m guessing a minimum of 3-4 basement apartments would have flooded. Would my hypothetical property manager have taken care of the flooding? Absolutely. I’m sure they would’ve gotten all the water sucked up and called the restoration company and dried everything out, etc, etc. But who’s footing that bill?

Me.

And you know what my property manager wouldn’t be doing? They wouldn’t be going out to each and every one of my properties and shoveling the snow away from the foundation to prevent flooding. I don’t say that spitefully, either, because I get it – with 1000 properties under management, it’s just not possible to do that. The sheer man power to handle that kind of snow removal isn’t feasible. At least not in any type of cost-effective manner.

And so I got to foot the bill *when* something happened, not “if”.

A Simple Calculation Changed My Life

Want to know what’s ironic, though?

Flip Properties don’t give me anxiety.

Maybe it’s the fact that there aren’t tenants that I have to schedule around to get work done.

Or maybe it’s the fact that half of the flip projects we buy don’t even have any toilets to begin with (for whatever reason, people seem to love taking their toilets with them. Ha!).

Logically, I think it’s the sheer fact that these homes are shitty to begin with, and so there’s less anxiety around keeping them in pristine condition. They’ll be nice eventually, but dumpy is already their default state.

The other thing is that each new project is a clean slate. It’s a different experience. We buy, we fix, and then we sell. It may be a headache during the renovation, but it puts my mind at ease knowing that there’s a light at the end of the tunnel.

For whatever reason, I just came to enjoy flipping homes more.

What really solidified the decision to move into flips for me was, once again, the math. Typically, we aim to make a minimum of $40,000 per flip. When I took $40k and divided it by $250/month (the amount we aimed to make per month on a rental), I realized it would take 13 years to make the same amount of money from a rental.

I realized it would take 13 years to make the same amount of money from a rental.

“But what about the tax benefits?”

“But what about property appreciation?”

“But what about capital gains?”

I. Don’t. Care.

My mental health and piece of mind are worth infinitely more than saving a couple bucks from Uncle Sam.

What Does Any Of This Have to Do With Hard Money?

Okay, you’re right. This has become a bit long-winded, but I think it’s important to understand our backstory.

After finally running the numbers and realizing that we wanted to get rich quick, we went *ham* on flipping. We sold all of our rental properties, and to this day, I don’t regret the decision in the slightest.

Before long, we found that we had accumulated a good amount of capital, both from the equity cashed out by selling our rentals, but also from flip profits. It was a good problem to have. We had more capital available than we had flip projects, and we didn’t know what to do with the excess.

Enter Hard Money.

We were very familiar with Hard Money, because we had borrowed it so frequently for flips. It never occurred to me that someday we’d have enough capital to do it for others.

I got my attorney to write up all the required documents, and before long, we did our first Hard Money loan.

Hard Money was finally the ‘passive income’ I had been searching for.

Remember all the mental anxiety I had talked about with rentals, previously? It has mostly disappeared owning as we transitioned into flip projects, but it completely disappeared with Hard Money.

I’ve never slept better at night — truly. That’s not to say it’s stress-free or that you don’t have to do anything. You’re still running a business, and you still have to do your due diligence, but it’s still much easier.

You’re dealing with a higher-caliber person, and if the project they’re working on needs a new sewer line? Not your problem. As long as you’ve got a good enough spread between what you loaned them and the ARV and they’re a good borrower, your job is easy.

Looking Ahead

To date, we’ve completed 16 Hard Money loans, and things have never been better. I’m sure there will be bumps in the road, as there always are, but I’m incredibly pleased with our decision to ditch the rentals and go all-in on Hard Money.

After we began lending more, we discovered there really wasn’t any good software out there for issuing, tracking, and managing loans. It’s relatively easy to do with just two or three projects, but any more than that and Excel quickly begins to fall apart. That’s why we decided to build Lendr.