2008-Style ‘Massive Opportunity’ in Real Estate, Loans to Secure

  • Travis Hanson secured a guardian line of credit so he can take advantage of a market correction.
  • He then purchases a house and renovates it using the loan.
  • Once the home value is increased he requests a mortgage for the after repair value.

Travis Hanson began investing in real estate in 2009, while he was still a law student in college. It was in the midst of the financial crisis that began a year earlier, and home prices had plunged drastically.

Even after becoming a lawyer, he continued to grow his real estate portfolio because of the cash flow it continued to yield. He has now amassed over 109 properties with about 150 rental units, according to county records viewed 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 hosts in-person networking events and one-on-one coaching.

As high mortgage rates and inflation push many buyers to the sidelines, he anticipates an even bigger buying opportunity than that of 2008. He’s pacing 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 trough two years later, according to Census Bureau data. Although the picture is not nearly as grim nationally and there isn’t yet a crisis of 2008 proportions, home sales are slowing nationally, and prices are falling in several cities that saw rapid price growth due to the pandemic.

To seize this opportunistic moment, Hanson has secured a guidance line of credit for $5 million, according to a screenshot of an email from his bank. This is a line of credit (LOC) that is approved by the bank, but is not openly available to the borrower until a specific event, which is often triggered by a request for funding from the borrower.

“So that’s what I have lined up already just because I think there’s going to be a massive opportunity,” Hanson said.

His advice for those starting off

Most people don’t have a ton of cash readily available in the bank. This is why Hanson recommends considering a line of credit (LOC). This is a loan anyone can request from their bank, as long as they have a decent credit score, he noted. Otherwise, if you have property, it can be put up as collateral against the loan. Some banks may require you to hold 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 anytime and repay them during the life of the loan. There is also closed-end credit, which the bank grants 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 his own cash is already tied up. It allows him to make a cash offer on a home. He also uses it to cover rehab costs. However, this type of loan can often have a higher interest rate than a conventional mortgage, so he plans on repaying the loan once the property has been rehabbed.

He renovates the properties purchased to increase their value. This allows him to return to the bank and request a mortgage on the house. A third-party appraisal will then show proof of the home’s new value, allowing the bank to grant him 80% of the after-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-lease the property as proof to the bank that the rent is higher than the PITI. However, using rent rates from similar houses in the area is another way of showing a bank how much rent it can collect.

If the process is executed correctly, Hanson now owns a new property without using any of his own money. The rent then pays for the mortgage of the new house.

There are two major mistakes that can turn a great deal into a very bad deal, he noted. The biggest risk is not knowing your end value and you end up with a low appraisal. The second biggest risk is if you don’t estimate your rehab correctly, he added.

This is why it’s important to know the market you’re in very well, he said. If you’re just starting off, he recommends hiring a savvy local real-estate agent.

Also, use a PITI calculator to determine what your monthly costs will be. This can be found on Google. To determine rent rates, Hanson uses AppFolio, a property management software. But if you’re in a larger market like a big city, websites like Zillow can also be reliable.

When it comes to the properties he purchases, Hanson looks for homes that look like they are a big mess and require rehabbing, he said. And since he’s able to offer a seller cash from the loan he’s secured, he can often negotiate a great deal.

“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 vacant because they can’t sell it due to the way 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 run-down house, you can snap 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 on record, offering to buy the house.

If it looks like someone is living there, he will look up the address through property management companies and determine whether there’s a lease on the house. If not, it usually means it’s owner-occupied.

In that case, he will often knock on the door himself.