BRRR Investing in multifamilies strategy, holes?

Question

Hi everyone,

Long-time lurker here, like many people Rich Dad Poor Dad got me hooked on RE over 15 years ago.

Unfortunately, I never put my plans into action.

As the title suggests, I'm planning on using the BRRR investment strategy in multifamily properties.

Here's how I plan to execute my strategy:

- Currently in the process of paying down some bad debts that we've accumulated, unfortunately.

- HELOC of around $50-70K will unlock capital to start investing

- First 3 houses will be bought with the aim of paying down my kids' colleges:

. House 1: Budget 300K - 10-yr mortgage

. No extra cashflow expected, goal is to build equity in the property to get son 1 to college with HELOC on equity in the property. He is currently 10 yrs old

. Timeline: As soon as debts are paid off (around 18 months to 2 yrs from now)

. House 2: Budget 300K - 10-yr mortgage

. No extra cashflow expected, goal is to build equity in the property to get son 2 to college with HELOC on equity in the property. He is currently 7 yrs old

. Timeline: 1 - 2 yrs after House 1

. House 3: Budget 300K - 15-yr mortgage

. Goal is to get daughter into college. She is currently 3 yrs old

. Timeline: 2 - 3 yrs after House 2

The idea is to spread this over time, allowing me to save some money and use the HELOC amount over and over again, to attain and keep properties

You will also notice that I'm assuming that their college tuition will cost 300K each. There's no telling of course how much it'll cost in 8, 10 or 15 years. Some forecasts say it'll continue to rise like it has in the past 10 years. Other forecasts say it'll fall. I'm assuming a marginal increase over the current rates, and anything extra can be financed via student loans.

After the first 3 houses:

My plan is to keep executing the same strategy over and over again with 15 - 20 yr mortgages to keep those properties to fund our retirement. Goal here is different, with some cashflow planned, to keep the ball rolling.

I'm currently 37 years old, and plan on working full-time throughout this process.

I'm quite handy, so will be doing some of the BRRRR work, but not all of it.

Where are the holes in this strategy, or are what details am I missing?

Do you see a better, more efficient way of achieving the same goals?

Jaysen Medhurst · Answer

Hi @Amr Rashad. Always great to see another CT investor here on BP. I grew up in Manchester and have family in Ellington, so I know that area well.

My first question is about your "bad" debts. Will they prevent you from getting a mortgage? If not, I don't see the point of waiting 18-24 months to get started. If they will be an impediment, can you use your HELOC to pay them off now? The interest rate will probably be lower and you can aggressively pay down the HELOC to make those funds available for your first investment property.

Over the last 30-40 year college costs have far outstripped inflation and I don't think there's any reason to assume that's going to change. The good news is that very few students actually pay "full freight" so those scary tuition numbers are misleading.

Using short-term mortgages actually doesn't make as much sense as you might think. The difference in rates is marginal (especially now) and you give up a ton of flexibility. Better to get a 30-year note and pay it down like a 10-,15-, 20-year. Sure, you'll pay a little more in interest, but if something unforeseen happens, you have the flexibility to reduce your payments to get through a rough patch.

I would challenge you to think about think about how you fund the kid's tuition a little differently. You're basically aiming to have $300k in equity to tap for each child as they go to school (we'll put aside inflation, NPV, and all that complicated stuff for the moment). So that's 75% LTV on a $400k property. How else could you use $300k? If you were to put that into a larger MFR that generates a modest 12% CoC ROI, that's $36k/year. Maybe not enough to completely cover college costs, but will get you most of the way there. The big advantage is that with a property in the $1.2-1.5MM range you're going to see a lot more appreciation than you will with the $400k property. Plus, once college is finished you'll continue to have that $36k of cashflow each year. Use that to pay off any student loans, graduate school, etc.

Looking forward 30 years when it's time to think about retirement, even if you never bought anything else, you and your wife are looking at $108k/year in today's dollars. Is that a good number for you to retire on before considering Social Security, 401(k), and other investments?

I'm not saying that my approach is necessarily better, but just a different way to think about it.

Terry Fox · Answer

Hi @Amr Rashad, fellow investor who lives in Ellington, CT saying hi. I own duplex off Hoffman Rd and it has performed well. It’s tough to find a single family to cash flow and the lack of multi family in Ellington creates value. There was a multi family on Windermere with a for sale sign. Not sure if still on the market.

Amr Rashad · Answer

Thanks @Jaysen Medhurst - that's exactly what I'm doing now.
Let me run these numbers and I'll post them here for you guys to review. Again, I know this will only be 'the plan' and reality could be much different, and the market changes. I still want to plan this out as much as I can.

Will circle back to you guys once I have the numbers figured out.

Jaysen Medhurst · Answer

@Amr Rashad, would love to grab a drink once the world returns to normal...

To be clear, I wasn't suggesting necessarily buying a $1MM+ property right away. Start with smaller value-add properties with the aim of trading up prior to your first heading to university.

Filipe Pereira · Answer

Hey @Amr Rashad, I love seeing the long term planning here. I'm also a fan of what Jaysen said, I really think you can remove some of the stress of having to find a property where there is enough of an equity gain by rather finding a property that cash flows sufficiently.

Not that I see a hole in your plan (I don't, it seems very well thought out), but I would figure out what it costs per month over a 12 mo. period to send a kid to school. That's the number I would be targeting for total cash flow from all of my properties. If I happen to get some forced appreciation / equity along the way, even better. Personally, I'd rather pay via cashflow than hope that the equity is there.

I guess that actually brings up a potential short coming of your plan, actually. What if things are going great gears 1-7 and we get a massive market correction year 8? Will your kids not be able to go to college? Rental rates wouldn't be affected as much though - so I'd say you would be on more steady grounds if you went that route vs hoping the market supports the equity you need.

Feel free to reach out anytime, I'm just a couple of towns over!

Jaysen Medhurst · Answer

I think you're broad outline is a good one, @Amr Rashad. Now drill down. What does that look like on a year-by-year basis?

• How many units do you need to add each year?
• How much equity do you need to build each year?
• What are your cash flow goals each year?

Amr Rashad · Answer

@Terry Fox - thank you for chiming in! When we first moved to Ellington, I drove around to try to find if any multifamilies are present and noticed the area around Hoffman road is the only one that seems to have any.

I'll go check it out to see if it's still there, and if the numbers make sense.

@Filipe Pereira - thank you for your input and the compliment.

Planning this way (and writing down my plans) is the only way my brain works :) Keeping things in my head doesn't work anymore, unfortunately :)

You also bring up an excellent hole in my plan; using equity vs cashflow to pay for college. I think it's one area I hadn't thought through, when structuring this whole thing, and your point makes total sense. Using cashflow should be the goal, not equity. This, in combination with @Jaysen Medhurst's excellent point (taking 10 - 15 yr loans is not the best idea, no buffer to fall on) makes me re-think the plan in a different way...

I'm thinking what I probably need to do is:

- Start with value-add investments in Class B multi-families on 30-yr notes asap

- Goal is to move up to $1MM+ properties, to utilize cashflow for college education & retirement in 8 - 10 yrs, just as the kids are hitting college age

Fallback is, of course, to use student loans in case of any bottle necks that are faced. On the longer run, the bottle necks & cashflow coming from properties should work themselves out.

Does this seem to cover everything you guys mentioned?

Thanks again for running through my crazy plans guys - truely appreciate it

P.S - When the world goes back to normal, I would really appreciate it if you guys would accept a humble invite to drinks/lunch/whatever as a token of gratitude.

Amr Rashad · Answer

Thank you for your input @Jaysen Medhurst,

you also provided excellent input to my other thread from a few weeks ago :)

I have thought about repaying my bad debts using a HELOC. I've done a bit of reading about this previously and the lower interest will mean I can pay it down sooner. It's bringing my credit score down to the early 700s because of high utilization (I have excellent payment history though). This is why I want to pay it off first, so I can boost my score (and my financial position) to be able to invest comfortably.

I agree with you that buying a 1.2 - 1.5MM multifamily makes sense in my case, because of the equity I'd like to build. It's definitely where I'm going with this my real estate investment plan. Should things work out, buying 1 - 5MM Class B properties is where my bread-and-butter should be.

I also agree that college will not necessarily cost 300K each due to inflation, . It's just nice round figure that I can use to help put a plan together (they're going to have to aim for these scholarships, if they want good schools! :) )

The challenge right now is coming up with the capital to buy a 1.2 - 1.5MM multifamily out the gate.

I can probably raise about 100K now using the equity that I've built so far, that's why I'm trying to piece-meal it by buying several smaller multi-family houses. Once I have enough equity, moving into the larger 1 - 5MM properties because of the multitude of advantages they present.

If there's an angle that I'm not seeing here, I would appreciate it if you could help point it out. As far as I've read here and elsewhere, the plan that I've posted above seems to be the most logical for my current situation.

Completely off topic here, but after the whole virus thing blows over, if you're ever in the area, I'd love to buy you a drink sometime

Thanks again for taking the time to reply to the postsAmr

BRRR Investing in multifamilies strategy, holes?

BRRR Investing in multifamilies strategy, holes?

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