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Nathan R Andersen
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Roadblocks to my goal of scaling faster

Nathan R Andersen
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Posted Oct 27 2022, 20:30

Bigger Pockets community

I come here to post a ridiculous wall of text with a few questions to help me in my quest to financial freedom, wealth, and supporting my spouse. Let me lay out some details below, some of my plans, and some of my problems or future road blocks to see what all of your collective knowledge can solve.

Background: 

My wife came from homelessness and was driven to earn her doctorate. She works a killer w2 job that makes us a good living. She also wants help with the financial burden she bears. I run a plant nursery from my home to be home with our 3 kids and help provide some cash here and there, but it isn’t sufficient to feel that she is being provided for (reasonably so, I get it). My quest is to provide through real estate.

*790 Credit score, rough DTI due to wife student loans (hopefully forgiven from Public service loan forgiveness in 2 years)*

We live in SoCal, have a home worth 500k roughly, bought it for 259k 6 years ago and a 150k HELOC on it atm. We are under contract for two 4-plexes (Indiana and Maine) and have spent 60k~ on down payments. We have figured around 9k in cash flow through year 1. We'll be using that cash flow to pay back the HELOC for the first few years (hopefully 3-4 as we overcalculate for repairs, capex, and other expenses to be conservative)

Plans: 

My plans are to hopefully scale much faster than buying two more 4-plexus and just sitting on it until we pay back the HELOC and then buy some more. My initial plan was to buy a property, combine the cash flow and hopefully pay it back faster. Then once I lower the HELOC enough buy another and so on. I see this as a decent plan for 20 years as I can build my money's velocity as time goes.

I would love to do things like BRRRR with the remaining 80k~, find a way to partner with someone to speed things up, creative financing, seller financing, and possibly flip or do other things. The problem is cash flow is harder to find, and deals I come across either are too much to finance at a higher rate (not to mention the HELOC interest payment), or are great buys for 3-5 years down the road and will appreciate quite a bit. I've tried to come up with ways to make this work, but I'm coming up with a good idea and it falls short of something, like cash flow lol. I'm having a hard time putting the last pieces in the puzzle. This also is a bit harder because the cash flow we DO have coming in is used to repay the HELOC (the interest is included in the underwriting), so I don't feel comfortable investing into a net neutral and appreciation gaining market/deal.

Example: I think "Maybe I could partner with someone that could house hack and I could fund the operation with the HELOC!" then I can't seem to figure out a good way to split the equity/profit with them to make it work. I have the HELOC interest only payment I need to pay, and a way to pay the HELOC back. Can I split the profits 50/50 once the HELOC is paid back and we factor the interest payment into the underwriting? This takes advantage of a lower down payment, but leaves the live in person to make a payment that funds the cashflow, otherwise it doesn't make money until they leave. Who is funding repairs? Etc. This just seems like a great situation for them to do without me, because I'm not adding much value. I'm not sure this is a great partnership.

Questions:

Does getting a partner seem like the only way to scale quicker than I want?

Is there a way to setup a partnership where I can still cash flow up front? What am I missing?

Am I doing something wrong or in the wrong market when I’m analyzing BRRRRs and barely cash flowing if at all, or are possible value add and refi out some money, but negative cash flow for 3 years at like -$300/month?

I also don't know if I'm looking at 5+ unit properties properly, but they seem to not cash flow for me, even though they tend to be priced based on cap rate and debt service coverage. (example, 700k for 7 unit with room to expand, NOI of 74k, but the debt service would be 73,568 because I would only have 10% down. I'm asking for creative/seller financing, but 1031 is making it difficult)

Tell me where you see a lack of logic in my plans please :D 

All this said, I’m keeping at it, looking for seller/creative financing, and will keep going whether you tell me to stop, give up, or not. Not looking for ya’ll to provide my financial freedom. Thanks so much for all your advice and help community!

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Nathan Gesner
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  • Cody, WY
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Nathan Gesner
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  • Cody, WY
ModeratorReplied Oct 28 2022, 04:53

There are about 72 questions in there and it's making my brain hurt, so I'll limit my advice.

Your cash flow comes out to about $93 per month, per unit. That's rough. It's common for a tenant to stop paying rent and leave a damaged apartment. It could take three months to get the property back, renovate, and find a new renter. That's three months of lost rent, utilities, and maybe $4000 to replace flooring, patch/paint walls, and clean. An example like that could eat up 66% of your annual profit. I guess it depends on how you're setting aside reserves, but your margins feel thin.

You have this student loan debt hanging over your head. My opinion isn't popular, but I think your focus should be on paying that off. Many will tell you that it's better to pay 5% interest on the loan while making 10% return on your investment so that you're 5% ahead. That's a fool's errand. Financial discipline gets you ahead in life, not shortcuts. 

I don't know how much a home-based plant nursery earns, but I'm going to guess it's more of a hobby. Staying home with kids is noble and I wish more people did it. Once they are school age, you should be using those hours to hustle and build some income. You could drive for uber, deliver food with doordash, get a dog-walking business, wholesale properties, get a job as a home-based caller or IT tech, and so many more things to increase earnings.

To summarize, I recommend you focus on increasing earnings, paying off the debt, and then investing from a position of financial strength.

  • Property Manager Wyoming (#12599)

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Nate Sanow
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Nate Sanow
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Replied Oct 28 2022, 05:16

The one thing I'd suggest caution on the most is the sentence "we have figured" in conjunction with your plans for the "cash flow". You have a nice round number of $9,000 and in my experience true net cash flow is rarely nice and round and even, implying that your numbers might need tweaking. I'm not knocking it, I'd be a hypocrite, I ball park all the time. But if I follow you correctly, you are about to pick up 8 doors as an investment. That is A LOT all at once. No shame in seeing how it goes. I can promise you it won't be all roses and sunshine. What if one month 4/8 don't pay? What if another month a hot water tank goes out? Etc. Sit on that extra money from the HELOC, at least for a short minute after you pick up these 4plexes. Give it a little time, be sure these properties are a blessing and not a curse. Don't burn through all other reserves.

Also I see many people start off with using the traditional down payment route and then wish they could scale further but if going 20% down a finite budget then the issue is not the finite budget, we all have a finite budget only the US Government doesn’t have a finite budget … but the issue is the down payment. That money is now held hostage as equity for awhile until appreciation or resale. Conversely, brrrr deals and flipping create liquidity and free up the liquidity that was temporarily held up inside a property. 
there is more risk, more headache, but more freedom on how to recycle capital over and over again and bring about scale. That day can / will come when the time is right. 

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Chris Levarek
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Chris Levarek
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Replied Oct 28 2022, 06:46

@Nathan R Andersen You are on the right path. Scaling is about partnerships and picking a role in said partnerships based on experience, capability and time. I'd add a fourth option called personal enjoyment or desire in the role, but the afore mentioned three are usually the logical choices for selecting your role. 

So if you have the capability to fund a deal and someone else has the experience and time, you have the answer. If you have the time and funds, you need someone with experience, etc.

My suggestion is do not chase trying to do it all. You won't scale as fast and it won't be as easy.

If you want cashflow, try being a private lender instead as in the current economy, this is a very important position with priority on cashflow.

Some other suggestions :

Monitor your HELOC interest as they are variable in most cases. This could be drastic if you loan out the capital at a lower rate.

Invest out of state if you numbers don't work in state. Find a partner.

Don't force numbers.

You can split the partnership any which way. 50/50, 30/70, 20/80, etc.

All roles have value. It's up to the partners to decide how much.

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Nathan R Andersen
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Nathan R Andersen
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Replied Oct 28 2022, 17:06

"You have this student loan debt hanging over your head. My opinion isn't popular, but I think your focus should be on paying that off. Many will tell you that it's better to pay 5% interest on the loan while making 10% return on your investment so that you're 5% ahead. That's a fool's errand. Financial discipline gets you ahead in life, not shortcuts."

The loans will be forgiven/paid off in two years due to her having worked a public job that qualifies for public loan forgiveness after 10 years. We're making minimum payments until then. I agree, sorting out financial things first is always a priority, but thanks to the government offering this program, we end up saving 100k+, so we'll be taking that route. 

"The one thing I'd suggest caution on the most is the sentence "we have figured" in conjunction with your plans for the "cash flow". You have a nice round number of $9,000 and in my experience true net cash flow is rarely nice and round and even, implying that your numbers might need tweaking. I'm not knocking it, I'd be a hypocrite, I ball park all the time. But if I follow you correctly, you are about to pick up 8 doors as an investment. That is A LOT all at once. No shame in seeing how it goes. I can promise you it won't be all roses and sunshine. What if one month 4/8 don't pay? What if another month a hot water tank goes out? Etc. Sit on that extra money from the HELOC, at least for a short minute after you pick up these 4plexes. Give it a little time, be sure these properties are a blessing and not a curse. Don't burn through all other reserves."

I agree, we actually have 188k on the HELOC but wanted to leave around 30k+ in reserves to be able to pay the mortgage, any crazy cap ex things that come along, etc. Hence the 150k HELOC with 60k used already (high estimate for the second property and closing costs). We actually plan on waiting a few months and maybe working harder to find a deal afterwards unless something screams at us before.

I'm hoping that we wait and stuff dips a bit more and then we can jump on a good BRRR if things go right. Thanks for the input!

@Chris Levarek I love the 3 roles that you presented. I definitely have the time, I have some experience in renovation (used to do finished carpentry with my dad, helped him build our house when I was younger so lots of jack of all trades master of none), and I have a tad bit of capital to use. I guess finding someone that is lacking in one would be the route to a parnership. Do you have any suggestions for me doing this out of state and how I could add value to a partnership from afar if they're in the location themselves? It seems like them having time would be most helpful, but am I missing something that I could be doing to add value that is plain to the trained/experienced eye?  Thanks for the advice btw. 

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Bethany Turon
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Bethany Turon
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Replied Nov 6 2022, 13:36

I think a lot of real estate is finding the methodology that works best for your skill sets, goals, and time availability. Your goals all teen fine and seem to make sense. I would share that the properties I have purchased since joining the BP crew tend to end up following the 1.5% rule (monthly cash flow 1.5% of sale price). When I analyze properties, I look for cash flow after expenses sufficient to repay my down payment within 3 years. There are others who practice the BRRR method, but that's extremely difficult to execute without a boots on the ground partner who is willing to put in all the legwork (property manager, contractor, etc that you trust immensely). I would say based on the numbers you posted, you could find something in a different B class (solid) market that is pretty turnkey with stronger rate of return (depending on where interest rates were at the moment, of course).
Hope that helps.