How to scale after your first property

Question

I am 22 years old from NW Washington. I currently own a 4 unit rental property in Mount Vernon, WA, that I bought with a partner. We remodeled 2 of the units and have done a substantial amount of work around the property, and we have roughly $270,000 in equity. We are wanting to continue to scale, however we are unsure of the best way to go about it and what the next steps would be. Prices are very high and cash flow is hard to come by in our area. We are open to investing out of state. We are fairly inexperienced so any advice is appreciated. What is the best way for us to grow our portfolio. Thanks in advance.

Julie Marquez · Answer

@Brayden Zender Sounds like a great investment! We love our apartments in Mount Vernon, they are always in demand and are great investments. What are you long term and short term goals? Do you have time and want to be hands on? How is the cash flow on this current investment?

Kerry Baird · Answer

TO expand on the HOW you scale.  If you live in a unit, you can borrow against your equity more easily than if you do not.  To find a relationship lender, call or visit the small local community banks and credit unions near the property.  Have your income statement both actual and projected, real estate owned, your detailed plan for going forward, have your FICO score, tax returns.  Ask if they have an appetite for portfolio lending and if they have in house underwriting and lending.  You'd place your rents there, to their benefit.  They might offer business lines of credit or renovation loans.  It will take some time to find the "right" flexible lender.

Kerry Baird · Answer

That cash flow is nice and high.  We worked to cultivate cash flowing houses as the base of our investment pyramid, followed by fewer, nicer houses in an appreciation area (fancier houses in a beach side location), which we use for STRs.  They barely cash flow and grow significantly in equity.  The cash flowing houses allow us to buy those houses that build more wealth.

My thoughts, should I be in a similar place: see if you can find similar properties to the one you have now.  Save that cash flow up for your next down payment.  I have been able to find sellers by looking for similar properties to mine and hand write “I want to buy your house” letters, outlining the benefit to investors of seller financing.

For example, they will receive a lump sum for their equity, and receive the rest of their equity over time, which spreads out the capital gains taxes they pay. I offer 6% interest-only for 5 years, but you can tailor this to your own strategy.  Finding properties off market and getting seller financing reduces closing costs by a heck of a lot, and often you can find sellers will not be over the top on pricing, as their properties need some work when they aren’t actively looking to sell.

This is something you will encounter if you sell your current property; that you will get some of that equity back but there is a lot of money that will be lost in closing costs, taxes, agent fees and the like.  The property you have now is a keeper with both cash flow and equity.  I’d look to find more of those, as I regularly do by riding my bike in my “farm” area and talking with sellers. My bio talks about the deals I’ve done with seller financing.

Brayden Zender · Answer

We are currently cash flowing around $900 a month. We would have trouble cash flowing if we were to do a cash out refinance with the current interest rates. I anticipate the area having good potential for appreciation, but am also willing to consider a 1031 if that is our best option. Would a HELOC be a decent option in this case?

Ko Kashiwagi · Answer

Hi Brayden,

If you don't want to keep the property for the coming years, it may be better to do a 1031 exchange. If the property can cash flow or has potentials for appreciation, it would be a good idea to do a cash out refinance and move on to the next property. Would that property cash flow if you were to do a cash out refinance?

Tanner Lewis · Answer

It depends on how the current deal is performing. But you have two main options: 1) cash-out refinance and keep the property or 2) 1031 exchange into a larger property.