Quote from @Joe S.:
Quote from @James Hamling:
Quote from @Ken M.:
Quote from @Marcus Auerbach:
Quote from @Ethan Brackin:
Quote from @Marcus Auerbach:
Quote from @Ethan Brackin:
Quote from @Marcus Auerbach:
Quote from @Ethan Brackin:
Quote from @Paul Novak:
Quote from @Marcus Auerbach:
Quote from @Paul Novak:
Marcus I think this was a great post. I have not subscribed to the stance of trying to get into a property with as little down as possible just to generate cashflow. I have actually taking the unpopular stance of the exact opposite. I have tried to focus on properties that are in good locations where I can attract good tenants and then adjusted what I put down to hit my cashflow goals. Not adjusting for vacancy and maintenance my cashflow goal on a property is $500 per month at a minimum. We have put down 20 - 40% on some properties to achieve this goal. Like you said we have been saving upwards of 60% of our W2 income and business cashflow in order to do this.
Hi Paul! I think I am just south of you? Unpopular maybe, but for sure realistic and prudent. Buying quality assets that are in a desirable location and in good condition with a modest amount of leverage is IMO the only approach that I feel comfortable recommending. I have tried pretty much anything personally and I have seen so many investors start and either succeed or fail - well, let's call it abort and sell to never touch RE again.
And then I get calls from OOS investors who want to buy a 120k duplex in Milwaukee and when I try to tell them what will happen they go: uhm, I don't think we are a good fit. (Which is true, because I do mostly luxury residential, just trying to help)
Marcus, you are just south. I invest in the Sheboygan area. I agree with your assessments. So much content I see about ways to put as little money down as possible or doing the BRRR method so you can purchase a property and then pull out all the equity so after it's rehabbed you can get all your capital back out. I am not trying to knock those approaches and obviously they have worked great for many people but I feel the market is different then it was in the past. Personally I am not finding deals that could support those strategies in my market today based on my current skills and available time. If I took that approach I would have negative cashflow which isn't a good sustainable business model. I am okay with limited cashflow while I'm in my prime W2 working years but not negative. My business still needs to sustain itself. In my opinion that leaves me with two options. Sit back and wait for the market conditions to flip to where those strategies would work for me, or adapt to the current market. Sitting on the sidelines for me isn't an option. Knowing I'll be holding onto these properties for the next 30 years plus I have no issues with my strategy. I also am not looking for cheep properties in bad locations that could turn a quick buck. I want properties that I am proud to own and if I was personally looking for a rental I would be willing to rent. Obviously that isn't a requirement for most to buy a property but it's something that's important to me. Because I purchase properties like that I feel we attract tenants that we can relate to which helps us on the property management side with communication and working through issues.
Why do you believe there is a higher likelihood of negative cash flow with BRRRR? Is it because the loan you assume after a cash-out refinance is more likely to be higher than your gross cash flow?
Hi Ethan, I have been BRRRR-ing in Milwaukee for over a decade and after 2016-2018 or so I had to work increasingly harder to make deals work (much more complex rehabs: mold, foundation issues etc). Today our inventory is so low, that sellers don't have to give me 50% discount because of poor condition. They will find a first time home buyer that will be happy to pay close to what the neighbor's house (in great condition) is worth. If you can find one where you get the price to match the work needed, it is still one of the best strategies! But that's a big IF in 2025.
The approach that I take now is to let market appreciation and inflation do the heavy lifting for me. We have seen prices go up 8.2% in 2024 here and why would I work hard for half a year to do not that much better, if I can just do nothing instead?
Money, time and energy are interchangeable in real estate. If you don't have much money, but you do have time and energy, you can use that to find a unicorn deal that will still work with BRRRR.
Paul?
Thank you for the thorough response. Do you personally use traditional financing with BRRRR or do you pay for properties with cash? I have read the BRRRR book as well as some other investment books and though I am aware that the author recommends buying properties with all cash, I am still torn between going that route or going with traditional financing instead (or perhaps even a "hybrid" of those two options; saving up to put 40 to even 50% down or more to get higher cash flow and more equity right away, while also being able to forego the waiting process of building up enough capital to invest all-cash in another property again (assuming I don't use a hard-money loan). I'm not sure how this "hybrid" approach would affect the cash-out refinance or if the approach is even viable at all, though. I have never invested before so forgive my ignorance.
The most important thing on your first deal is to keep the risk low. You do this buy buying a quality asset in a good enough location. And by not biting off more than you can chew for the rehab. A cosmetic rehab is still quite a challenge for the first time. Paint, carpet, light fixtures, maybe some doors, plus odds and ends - you'll learn a lot! Conventional financing will work for this just fine. Yes you will need a 6 months seasoning period, but by the time you got the work done, a tenant moved in - the 6 months will be almost over. HML is expensive, better to use private money from friends or family. Once you got the first deal under your belt, you can start thinking about the second.
I did alright on my first 3 rehabs, but got over-confident and #4 was a massive mess and turned out to be a money pit. I took on too much. I remember looking at the $60,000 bank account for the rehab at almost zero, still checks to write and still more work I had not even scheduled yet. I felt physically sick and had to go tell my wife.. The good thing is that rentals are very forgiving and I eventually recovered and years later it even started cashflowing.
Your advice is invaluable, thank you! Lastly, do you typically find yourself cash-out refinancing your deals and, if you do, do you set your rent on the higher end to compensate for the increased mortgage costs you will inevitably have to pay after you refinance?
I am not in favor of growing via cash-out refi. If you just borrow more money, you are getting deeper in debt. As you mentioned, you have to eventually pay it all back, with interest. There is a healthy amount of leverage, but the whole point of investing is to grow equity, and eventually a return on that equity. If you constantly cash-out refi you reduce equity and cash flow.
That's why I am trying so hard to make the point that you need a business that generates cash so you have money to in-vest on top of what your W2 is making. You don't need to buy a car dealership, it can be a side hustle or an online business.
If you try to get more rent than fair market, you will rent to desperate tenants, who got rejected everywhere else. We do the opposite. We do everything we can to attract the best tenants possible and have them stay for many years. That's why our rehabs look more like flips and we even finish basements as we target families with kids who want to get into the school district.
'
"
As you mentioned, you have to eventually pay it all back" - which is true, however you either pay interest (which is tax deductible) and keep the asset, or pay you tax.
If you never sell, (you will it to your offspring) you never pay tax and they don't pay tax. Which is what we teach our investors how to do. When you sell though, you have the added costs of sales (real estate agents, closing costs etc) and you have the problem of finding the next great deal.
Just thoughts for the lurkers.
That is not correct or accurate.
There is tax implications to inheriting property: https://www.irs.gov/faqs/interest-dividends-other-types-of-i...
There is strategies to mitigate this such as trust but in such your not inheriting the property, there is just adjustments within the trust such as change of managers etc..
Finding a "next great buy" is NOT an issue if doing a strategy for enduring legacy.
Example, I have a client who recently transferred the reigns to generation 4, yes 4, of running the family REI Trust.
They have done 1031's going back generations, to which that tax-can is still getting kicked down field!
What Great-Grandpa started looooong ago, has now grown into this massive holdings.
So what do they do to "find the next great deal"?
They keep it simple, REAL SIMPLE, they only buy New-Con.
They sell an older inventory unit, get all there appreciation and equity liquid, and use it to secure 2 new built units.
Growing total holdings, resetting Cap-x clock, roll every dollar into that expanded holdings, and let it run 5-7yrs.
On average the entire portfolio keeps doubling every 7yrs. Do you have any clue how massive it's gotten now? Agent fee's etc. for cost of selling is a drop in the bucket compared to the returns.
This portfolio has now fully funded over a dozen university tuitions.
Because the cash-flow also keeps expanding.
Once upon a time they tried just camping out on properties for extended time periods. They found that cap-x kept gobbling up revenues and it was a net-0. BUT net-0 just on the cash-flow differential. What it DID cost them was appreciation, OPPORTUNITY COST, because they were only earning appreciation on that 1 vs the 2 it could have been had they pyramided when available.
And pyramiding not only multiplies the appreciation basis, it multiplies the cash-flow potential basis.
The math is very clear in this regard, compounding returns always beats static returns. That includes compounding returns basis.
Not to mention that as your unit count increases it insulates against impact of vacancy and other unforeseen expenses because each individual unit is mitigated across a larger grouping. This is how insurance works, imagine if an insurance carrier only had 10 people in it, 1 needs a surgery, POW that's a BIG hit. But with a million people 1 needing surgery is pin prick.
"But what if 500k need surgery at same time"..... Uh-huh, yeah we call that fantasy land. We have to work in reality sense of numbers not "what-if" ultra extremes of fantasy.
If you have 20 units, any 1 vacancy hit's 1/20th of revenues. VS with 2, vacancy in any 1 is 50% hit to revenues.
As unit count grows there is an arch of risk exposure that grows, crests, then starts dropping very fast. The trick is getting over that hump to descending risk exposure via unit ct. growth.
On the REI Trust where grandpa set up long go… so I'm following that they turn over their old assets and buy new construction and basically double they're holding every seven years.:)
Does the trustees sign to get new Loans for the new construction properties? How is that set up and is it a pretty smooth transaction?
It's a rather extensive "thing" now so probably a bit over the top for most.
There is the trust, and the trust has a continuity of control plan. There is a kind of "board" which is assorted family members who meet bi-annually to review, vote, decide on any items they need to.
That "board" has a designated person who is the active rep for the "board". Basically a manager. They make sure whatever assorted day-2-days are done. So there is a singular point of contact who's active and not a need to wrangle a whole group for every everything.
There is also a second designated person who's a kind of CFO.
The trust owns an LLC, let's call it Asset LLC.
Asset LLC is the ownership of the properties. There is a designated person who is the President/CEO of this LLC. Generally the same person who is the designated rep. for the trust "board".
There is a second LLC owned by the trust, call it Money LLC. The designated President/CFO is generally the CFO from the trust as well.
When in process of transferring duties to next persons, the newer persons start in the LLC, eventually take over that role, the exiting person remains on at trust, later bringing in the replacing person to that role as well. It's a process that happens over years.
There is other actions the trust does than just investment real estate, hence the separation of LLC's.
Asset LLC will "borrow" funds from Money LLC, as if it were any other private lender. Note is made, interest, whole 9, but kept simplified. I should add; NO, they do NOT do REI in all-cash, ever. They use financing.
There had been a recent addition of, call it, Landlord LLC. This entity leases property from Asset LLC on NNN basis, via funds "borrowed" from Money LLC, and operates the property for profit as a landlord.
Thus insulating Asset LLC from public facing liabilities, mitigating risk exposure because they are asset poor, they own nothing, only have the operational capital and not epic mountains of capital held because they don't have to, they can borrow as needed if needed.
So for the actual actions, say purchasing a property, it's the 1 person, as it's purchased by the LLC and the 1 person is the authorized signor.
They do consult with the "money person" but they don't technically have to. It's more a FYI were gonna be doing ____, sound good, great. A second set of eyes, call it internal underwriting.
So technically it's not a trustee, it's a managing member of the LLC.
And it all stems from the "board" at root. Because at the bi-annual meeting there is reviewed update of results from previous planning, planning of whats next, review, decision, and everyone has there marching orders and goes doing it.
It's all rather standardized.
About biggest "drama" I had seen is when there was a pitch for "what about mini-storage", which we discussed for some time, I equipped them with all the realities of it, we developed a few real world potential, really fleshed it out, "board" meet, reviewed, and decision was made of why chase shinny things when on a good proven known path. So kept to focus and just moving forward from there.
That's the long of it all, I hope that answered things.
To anyone considering such generational structure, I suggest:
- Wyoming as a organization state. Several reasons but primary is case law there, and the way things are set for LLC's, it's a very conducive environment.
- Use the "asset island" method from start. The trust owns an LLC and does actions thru llc's not itself directly. Separate the assets from the operations soonest possible.
- Anonymity is almost everything. The best defense against the "slip n fall Jimmys" of the world is to not be a target. WY is also very good for this.
For example, do you know what single family rentals are owned by Blackrock? I bet you've seen em and didn't even know. Because it's a company owned by, owned by, owned by.....
