I recently started investing in SFR's in May with a business partner; we formed an LLC. We both put in equal shares of cash and bought two properties. I liked it so much that I then lent our company another infusion of cash to buy the third property. The LLC is paying me back on a 36 month schedule, and the payment effectively takes most of the positive cash flow from the first two properties. However, the third property will net cash flow about $700-800 bucks after expenses. These properties all cost in the $50-60k range.
Note: I know my numbers look unbelievable. And long term they probably are. But all three houses have been gutted with new systems and structure and so short term I am estimating lower maintenance costs. Add that to extremely cheap property insurance and taxes and you get the numbers above. Its been 7 months with my first two properties and so far so good.
Both my partner and I have full time jobs, so our goal for the LLC is to maximize CASHFLOW, not necessarily ROI, and minimize effort. That said, in the short term, we are fine with realizing $0 in gains in order to grow the business. I'd like to own 6 properties within the next two years, and at the two year mark start taking my profits (about $6k gross). But now I'm at the point where I have absolutely no more cash to invest so I'll have to start looking at other ways to fund the next few properties.
I am really loathe to take out a mortgage because I hate the thought of paying someone else interest and I think origination fees are ridiculous. I have a ton of cash, but its tied up in a 401k. I've got good credit, so I could borrow from Propser or Lending Club, but they only do loans for up to 5 years so the payment would leave me zero room for error on the cashflow for the third property (although, at that point I'd have a fourth, so maybe that is still an option). Plus I'd still be paying someone else interest. I have not had much luck finding a HELOC b/c banks don't want to do that on a property owned by a business (plus that silly origination fee again). I don't like any of my options, but logically I know that most investors go into debt to invest because it gives them a better ROI.
I am also impatient. I want to invest NOW, before I loose my momentum. I know if I would just collect rent on property #3 for a year I'd have a sizable down payment, plus I could probably save up some more of my own personal cash to invest. But I really just want to keep going NOW. So, how do I fund three more properties AND get them all paid off within the next two years in order to maximize cashflow?
I've asked similar questions before, so I think I know what most of my options are. Now I want to know what YOU would do if you were me.
I'd strongly recommend you consider using financing. Origination fees suck, but so do rehab costs, taxes, and every other expense. It's a cost of doing business with OPM. You can still go for cash flow as your primary objective, but think in terms of Cash on Cash Return rather than the total dollar amount. Buy so that after rehab and closing/finance costs you are still below ARV and keep financing at or below 70% LTV to minimize risk of going underwater in a downturn.
Since you are using an LLC, you will not get terms as good as Fannie Mae loans, but you will still do far better on your rate of return and have cash to keep going.
(I bought 6 SFR in the last 12 months. Without OPM I'd have maybe 1.)
Congrats on your purchases. Sounds like a great market. Happy investing.
Thanks Doug! So what's the best way to use OPM and minimize costs? I ready an article here about BLOC, the idea being you can keep re-using the same money without paying the fees again. But I am having trouble finding a good company (my local banks do not do un-secured BLOC's, and I have been in business less than a year, on top of that).
You could try securing a business or portfolio loan (or 3 if necessary) against your other properties. Sounds like you have good personal income, so you could also offer a personal guarantee to make the bank feel better.
You might also consider paying yourself back after getting the 3 properties financed and doing some properties in your own name so you can get Fannie Mae backed loans. Read up on the Delayed Financing Exception for cash-out refinancing. It's a powerful tool for combining the best aspects of cash purchases and conventional financing.
Less conventionally, you could read up on some of Ben Lebovich's posts on how to buy houses with NONE of your own money.
In my mind the best financing you can get is a Fannie Mae loan. I am closing on my seventh property this month and this will be my seventh Fannie Mae loan. My cashflow from all seven properties will $4,100/month. I buy properties for 50 cents on the dollar or less. I use private funds for the acquisition and rehab costs then refinance into a Fannie Mae loan within two months or less. My out of pocket costs are only closing costs.
I've heard Fannie Mae mentioned a lot on here, but last time I asked (admittedly a year ago) I could not qualify because I buy and own the properties in an LLC. I'm not willing to give up the LLC, because I have a partner and this keeps everything separate from our personal finances.
Are you saying you get a mortgage in your LLC's name and then refinance that with Fannie Mae? Or do you do it all in your name?
I found this: https://www.fanniemae.com/content/guide/selling/b2/1.2/04.html, but it seems to indicate that you have to have used the home as a primary residence.
Amy what I do is buy In my personal name and the refinance in my and my wife's name. Once we make a few payments with Fannie Mae, we transfer ownership into our LLC.
Yes there is the due on sale clause but as long as payments are being made they will not call the loan due. Trust me this happens all the time. Of course I consulted with my attorney before I started using this strategy.
You could also look into doing a self directed IRA. You have to be careful to keep the transaction at arms length but it can be done.
You could also look at finding a private lender that will write a note but that will have a fairly high cost.
If you do decide on a self directed IRA you can still partner with your friend you just have to be very careful of the arms length issue.
Yep, if you've got a nice nest egg in your 401(k) you can roll it into a self-directed IRA and your IRA can loan to your LLC.
The Fannie Mae stuff is for individuals only, as said, you can deed it to your LLC later, but you'll still be on the hook for the mortgage(s) personally. If you are doing straight LLC you'll need business loans, which will run you a point or so higher on rate. One of the biggest advantages of real estate is the leverage, if you aren't borrowing ANY money, you are losing out on one of the things that makes RE a superior investment over others. Borrowing some money is a good thing, it'll allow you the ability to do way more deals faster, which is what you are asking, just keep your LTV's super low if that's where your comfort level is.
Unfortunately my 401k rules prevent me from rolling into an IRA unless I separate from my job. But its a chicken or the egg thing: I would separate if I could get to the money out to buy rentals.
Just wanted to reiterate that I am not looking to maximize my ROI. I am looking to maximize cashflow.
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