Analysis Paralysis or Calculating Risks on First (To Be) Deal?

15 Replies

excuse the lengthy email: My husband and I are at odds as to how to approach our first deal. We have been listening to Bigger Pockets podcasts amongst other formats and meet ups and recently decided to start analyzing deals. I was doing it more for practice and wanted to analyze different types of strategies to determine our best first move. After analyzing 5 deals over this past weekend, he wants to move forward on one where the numbers seem to make sense. our goal is to have me stay w2 and for him to eventually quit his w2 to focus on REI. I have 2 questions: -How many deals did you analyze/how long did it take you to jump into your first deal? -If you financed your properties with your own funds, do you go bang for your buck even if it will take longer to find deals that fit that model or tie up all the funds in the one deal? (eg, do i find lower purchase price homes off market or out of state so i can buy 4 properties vs invest it all in one property)? Considering our goal, The question i am asking myself when i analyze our first deal is how soon will i be able to get back in the game for my next deal? is that a good question to ask? -the cash flow on this duplex is 300-400/mo combined. and its fully occupied right now. but there would be no leverage (equity) to take out and apply to more properties. -We spoke to a mortgage broker who said we would need 25 percent down on a multifamily. 25 percent down (24k) would be 50 percent of our liquid cash. The other 50 percent i would want to keep for emergency funds and is still 10-15k shy of what i like to have on hand. -the property is in an area where i wouldnt expect much growth or immediate appreciation. my husband feels considering cash flow is positive we should just go after it and start learning. i feel tying up all of our avbl funds in this deal could mean he might have to work for another 3-5 years til we build up funds for the next deal if we are just accruing cash flow) we have other means to get funds: HELOC, 401k loans, credit cards to pay for repairs - but i am not a fan of debt or loans so i’m really hesitant to go these routes. because i am trying to replace his w2 income as fast as we can, i feel the strategy is: if 1 property i need leverage (equity) OR i need to focus on multiple properties at a much lower purchase price (out of state or distressed) that get me more cash flow combined. thoughts on tying up funds in the one or the other strategy of more units for more cash flow? thanks!

First, you are both right...and, you are also both wrong.  Let me try to clarify within the limits of this format.

1 - Your 1st Question isn't important, because any answer(s) you will get would/should mean nothing to you.  That's due in large part to the next point.

2 - Your 2nd Question can only be answered by you and can only be based on your ability to - 
     a - Analyze Markets, not properties
b - Understand How Money Works, and how it applies to REI.
     c - How to Design, and Follow, your own REI Plan that takes you to your Goals.
     d - That "a - c" must work in conjunction with each other, and none of them are more, or less, important than the other 2.

Renee, 

It sounds like you want for your husband to be able to replace his W2 income as soon as possible and you're trying to figure out what is the best way to go about doing that, do I understand that correctly?

So your dilemma is: 

  • Do you buy the duplex (which is a good deal)?  
    • But then you'd have to save up again in order to buy another deal. That takes a lot of time (3-5 yrs).
  • OR Should you buy a fixerupper which would increase your equity. 
    • But no cashflow.
  • Or should you buy multiple properties out of state because they are cheaper. 
    • But scarier because its far away and a different market. 

Based on what you said, it sounds like the fastest way to free your husband from his job would be to invest in a fixer upper. Flip it and earn yourself another chunk of equity. 

I like the out of state properties, areas like: Detroit, Cleveland, Indianapolis, Milwaukee.  The numbers make more sense there than they do in HOT markets in the Northwest like yours in Seattle and mine in Oregon.  If you'd like to take a look at what out of state properties go for, I can send you some properties that Im working on right now. You can take a look at them to give you a price point. 

I hope everything works out for you! Im here to help where I can so if you have more questions, I'll happily answer.

@Renee Chun I was in the same position as your husband for several years. I wanted real estate to be a replacement career. One time, I wanted it so bad that I took too much risk and ended up overleveraging and losing a lot of money on a flip. It took me 2 years to recover from that mistake but I ended up being in a much better position. Some people hit it big in real estate right from the get go and are tremendously successful right away. I'd venture that most are not.

First of all, I'd suggest a change in mindset. Don't be too eager to hit grandslams to make enough money to quit that W-2 job. Impatience leads to poor decision making which leads to errors that lead to losing money. Realize that it will take time to learn the business, develop knowledge, expertise, and competence. Success will come.

On a practical level and in my opinion, rentals are a great way to build wealth, not such a great way to make a living until you've accumulated enough. IMHO, your husband's best course of action would be to get involved in fix and flip if he wants a substitute job because that's exactly what it is. Rehabbing houses is work.

Instead of a rental use the money as a down payment on a flip using a HML, take your profit and put it into your next deal.

@Andy Mirza Thanks for taking the time to read my post (I lost all formatting/spacing doing it from my phone so it looked horrendous when it posted). I appreciate your feedback and though he may be upset with me about it, I am going to make sure we are braking enough to thoroughly evaluate not just how great the numbers appear initially on a deal but how quickly/does it enable us to get to the next deal! 

Originally posted by @Jeremiah Pedersen :

Based on what you said, it sounds like the fastest way to free your husband from his job would be to invest in a fixer upper. Flip it and earn yourself another chunk of equity. 

I like the out of state properties, areas like: Detroit, Cleveland, Indianapolis, Milwaukee.  The numbers make more sense there than they do in HOT markets in the Northwest like yours in Seattle and mine in Oregon.  If you'd like to take a look at what out of state properties go for, I can send you some properties that Im working on right now. You can take a look at them to give you a price point. 

I hope everything works out for you! Im here to help where I can so if you have more questions, I'll happily answer.

Jeremiah, thanks for the response! the mobile app didn't notify me of responses to my post so sorry for taking so long to get back to you. It's not so much me that wants him to quit his W2 (truth be told I would want him to hang on to it until this proved successful).  But he is really at his wits end with his W2 so I want to support him leaving as soon as possible. I think what might add some context to my hesitation to jump into all of this is the fact that I am 7 mos pregnant with our first child and he also has another business that is not thriving yet - so all the unknowns of the expenses of those things make me want to be fairly conservative and be as bulletproof as possible when we do pull the trigger! I would LOVE to learn more about what you're looking at. We have been looking in Louisiana (where his family is from - his sister is actually a broker out there who could property manage for us), Indiana and Ohio. I'm just not familiar with the markets in Indiana and Ohio so am a little more hesitant with those. What are you doing to understand markets that you don't call home? (Take a trip out there, network friends/family/property mgmt. companies, etc)? We've been looking at demographic info online but it still isn't the same as someone's expertise neighborhood by neighborhood. Even in Seattle there are some neighborhoods I would steer clear from even though it looks like all of King County is a guaranteed win!

Originally posted by @Andy Mirza :

@Renee Chun I was in the same position as your husband for several years. I wanted real estate to be a replacement career. One time, I wanted it so bad that I took too much risk and ended up overleveraging and losing a lot of money on a flip. It took me 2 years to recover from that mistake but I ended up being in a much better position. Some people hit it big in real estate right from the get go and are tremendously successful right away. I'd venture that most are not.

First of all, I'd suggest a change in mindset. Don't be too eager to hit grandslams to make enough money to quit that W-2 job. Impatience leads to poor decision making which leads to errors that lead to losing money. Realize that it will take time to learn the business, develop knowledge, expertise, and competence. Success will come.

On a practical level and in my opinion, rentals are a great way to build wealth, not such a great way to make a living until you've accumulated enough. IMHO, your husband's best course of action would be to get involved in fix and flip if he wants a substitute job because that's exactly what it is. Rehabbing houses is work.

Instead of a rental use the money as a down payment on a flip using a HML, take your profit and put it into your next deal.

if one is replacing income fast it has to be value add or HIgh producing commission income.. that can be flips or other commission income jobs.. 

rentals are long term wealth builders for most.. now some folks in the fly over states they can do this heck they can live nicely on 5 to 10k a month.. most of us on the west coast or east coast that simply will not cut it.. so it depends on what our needs are ..

@Jay Hinrichs thanks for your post! - the thought with the multi-family rentals was if there was leverage + cashflow, we could use the equity to re-invest in more multi-families. For example, we could possibly buy a house/duplex outright for $25-30K. The thought would be rent it for 500-700/mo but also take a HELOC out to reinvest in another $25-30K house (obviously I'm not talking about the Seattle market with those prices!) It might take a little longer to replace his income but as you said building long-term wealth. We already have a home ($1300/mo mortgage, bringing in $1500/mo with another room we are getting ready to rent for another $700/mo).

Sounds like the forum so far agrees that Fix and flips look to be the quickest way to replace that income. I totally get that! For me, there just seems to be a lot of risk AND cost to that I am really wary of. Worried about being fully leveraged and then life happening and being totally screwed. I will definitely spend more time thinking about how to mitigate my concerns there and see if that's a strategy I can get comfortable with. 

Thanks so much for your feedback!!

Originally posted by @Renee Chun :

@Jay Hinrichs thanks for your post! - the thought with the multi-family rentals was if there was leverage + cashflow, we could use the equity to re-invest in more multi-families. For example, we could possibly buy a house/duplex outright for $25-30K. The thought would be rent it for 500-700/mo but also take a HELOC out to reinvest in another $25-30K house (obviously I'm not talking about the Seattle market with those prices!) It might take a little longer to replace his income but as you said building long-term wealth. We already have a home ($1300/mo mortgage, bringing in $1500/mo with another room we are getting ready to rent for another $700/mo).

Sounds like the forum so far agrees that Fix and flips look to be the quickest way to replace that income. I totally get that! For me, there just seems to be a lot of risk AND cost to that I am really wary of. Worried about being fully leveraged and then life happening and being totally screwed. I will definitely spend more time thinking about how to mitigate my concerns there and see if that's a strategy I can get comfortable with. 

Thanks so much for your feedback!!

Keep in mind 25 to 30k rentals are as RISKY as rentals get unless your buying in some 5k population mid west farmers rural city.. 

anything in a major MSA and your buying in the ghetto and you will never collect the rent consistently this is financial suicide for out of state investors.

Originally posted by @Jay Hinrichs :

Keep in mind 25 to 30k rentals are as RISKY as rentals get unless your buying in some 5k population mid west farmers rural city.. 

anything in a major MSA and your buying in the ghetto and you will never collect the rent consistently this is financial suicide for out of state investors.

 @Jay Hinrichs: While there is definitely the possibility of a missed payment, in markets like Detroit, where a huge percentage of the rentals are Section 8, that is a pretty much guaranteed payment. I like guaranteed payments! 

Its interesting, in some markets, the culture there is fully accepting of Section 8 and in other markets (most notably is Milwaukee) Section 8 is frowned upon.  Regardless, the rent to purchase ratio is awesome in the midwest markets!  Also know that in higher end B class neighborhoods, properties sell in the $100,000 range, which is still a great deal for Rent Ratio! 

@Jeremiah Pedersen hate to bare bad news, but even in the midwest cheap properties are fools gold for a long term buy and hold. Any time you have a huge gap between fair market value and replacement cost, you pretty much know you are dealing with a money pit over a 30 year cycle. You can get very sophisticated with IRR calculations, but it comes down to the simple fact that the cash flow alone will not generate enough money for capex - which by the way is not a percentage of rent; the two have an inverse correlation. If you want to make it a percentage (for rough estimates) it should be tied to replacement value. You can make money with cheap properties by passing on the hot potato: buy one in good shape, rent it out for a few years and then quickly sell it to the tenant, before it needs a new roof. Or HVAC. Or kitchen. Or a new sewer lateral...

@Renee Chun Renee, another avenue (perhaps I missed it in the above text) would be to purchase one of these duplex setups as an owner-occupied property. You guys move into it and start from the inside... 

I'm at 16 Units consisting of duplex/triplex setup and the majority were done through buying a decent property, improving the costmetics of it and making it 'nice' and then renting the units out. 

Example of a Triplex I purchased 2 years ago:

Purchased for $235K FHA loan with 3% down.

First 30 Days - Updated the Lower Unit - Cleaning / Paint / Countertops / Windows / Smart Thermostat (Rehab was around $5K. I do my own work unless it's specialized).

Listed and Rented that Unit for $1200.00 

(Listed on CL; Don't be afraid to start high and lower it until you get people calling you).

That provided cash flow to continue fixing up the unit I was living in as well as the third unit.

Once it was "completed" I rented the other two units out and now the property has FCF of$1100 per month and I've moved on to another property. Free Cash Flow... after debt coverage and all expenses.

Downside is some moving more than the average person; upside is I can remain very liquid. Next step will be to refinance my holdings that are in traditional loans into a commercial product. 

@Marcus Auerbach - that is exactly where my hesitation is for properties in Louisiana - you can't count on equity only cash flow. however, my thought was for a market like this -  try to do a lease with an option to buy for the renters down there so i can get cash flow and also get out of dodge to avoid the capex requirements that for sure would be needed if i held it too long... i feel like most of the renters there must want a way to own but must not be able to come up with the down payment because the mortgage is 4x5 less the rent they are paying! Could be naive/rookie of me to think this way but we were thinking create leverage by buying the property in cash, then pulling $ out of it to basically recycle that into another similar investment - repeat that process - lease option to own with all the renters and sell before capex is due? 

@Austin Reed that's exactly what we are hoping to do except we will probably not ever do owner-occupy in a multi-family because we have 3 crazy dogs and a baby on the way :D we are definitely looking at multi-family or if we end up doing SFH due to budget constraints - look at renting rooms vs the entire house (we are doing that with a property and it brings in more than just renting the house as a whole).

Renee - note in that Austin bought a quality property in a decent neighborhood: you can tell because of the 235k price tag in Milwaukee. You want to buy a good deal and you have to have cash flow - but the lower price segements (often perceived as lower amount = lower risk) are cheap for a reason and actually carry a lot of risk and future cost. 

No new listing goes unnoticed on MLS. New investors underestimate how many seasoned investors are out there scanning the market every day with money to invest - they would buy up these cheap deals in a second if they would be any good. They don't, because they know better.

Lease options are an interesting tool and I have done a few. The issue is that most tenants will never execute the option - some say only 10% will, my personal experience is about a thrid will. The rest will forgoe thir option fee and continue to rent or move on to another one. Does not make any sense for you and me, but that's what they do.

@Renee Chun In regards to your dilemma about your husband wanting to quit his job. In my opinion and wisdom, Do not quit the job until your passive income is enough to replace. You gotta acknowledge there is a difference between knowing that REI can replace his W2 AND knowing how many assets it will take to get there (also how much it will cost to acquire each asset and how much time it will take to acquire 1 asset). Im sure you already know that, but I say it because Ive been blinded myself in the past and have jumped into a new venture that didnt improve my situation, but made it worse.

I'll PM you to talk about what we look for in the midwest and how I analyze them.


-Jeremiah