How to Scale - Milwaukee

Question

Hello fellow investors!

I've asked this group for a lot of advice on how to grow in real estate. I've managed to accrue 5 units since then (2 SFH, 1 Condo and a Duplex). All are doing great and cash flow is nice. I realize I could continue to slowly add a unit every year or so, but I'm really looking to scale at this point. I'm just at a bit of a loss regarding how to best do it... particularly when it comes to financing it. I want to purchase a 4 unit or greater. Are there any creative ways to finance it?  Can I do it under an LLC? Is it possible to take equity from one or more of the other properties without it being too risky (I believe I can only take a small % of the equity). Coming up with 25% of a 500k property, let's say, might not be possible for me any time soon.

p.s. I'm looking in the Milwaukee area only.

I look forward to any advice! Thanks so much!

Marcus Auerbach · Answer

Casey, private money is your easiest way to gain momentum, much easier than refinancing a whole package, everything else I have mentioned will aid and compound, but it takes time.

If you pay someone in your family 6% on their money you should be able to earn repay a down payment in 2-3 years with interest. You can make interest only payments and a balloon at the end or you can just use the entire cash flow. Key is to but a property in good condition, so you don't have to spend cash flow on repairs. I would also suggest that you have your own cash as part of the down payment, for example 50:50. That will also make your investors feel better. Plus it cus down the time you need to pay your investor out with cash flow. Whatever you do a mix of different strategies and income streams is always better than trying to make it work with a single tool.

William S. · Answer

@Casey Kooiman

One thing to note on using family/friends for private money is that the bank will ask about it. You can call it a "gift" which there is a limit per family member. The bank will hassle your family member and ask for various documents.

Another approach is to let the money season in your account. I think if it sits long enough in the bank, they will not ask about it. I'm not sure, but this may be a possibility. Let me know if it is!

I do like @Marcus Auerbach strategy of going in 50:50 for the money down. Structure a low interest return. Something more than the bank, but less than a HML. Pick your yearly repayment.

I think it's a reasonable way to scale. It's tough to get to five properties on your own. Once you're there though and have cash flow from five properties, things should snowball quick. At that point you shouldn't need any help.

This is where I'm at. Trying to scale, but within reason.

Casey Kooiman · Answer

That sounds great! I'm going to look into that method.

Casey Kooiman · Answer

@Marcus Auerbach Thank you very much for the response! Definitely agree on the statement regarding cheap vs. good areas. I've definitely learned that one and have a mix of properties in varying areas to prove your statement, haha. I would say my equity between the 5 properties is 80k. I believe it depends on the lender, but could I borrow some of that to pay for a future investment? What is the general percentage that can be borrowed for another investment? Based on the cash flow, I could probably buy a new property a year if I commit myself to it... I just figure there have got to be ways to grow quicker now. Private money should be possible if I can figure out a way to structure it properly.

Rob Beardsley · Answer

You can create a single purpose LLC that owns the property and you can let family and friends buy partial ownership in that LLC.

Casey Kooiman · Answer

@Rob Beardsley Thank you for the response! Would you suggest adding them to the mortgage? Or have a separate agreement under the LLC?

Marcus Auerbach · Answer

@Casey Kooiman Private Money is the way to go like Rob said. You should be at the point soon where cash flow starts to pay for the next deal. In my experience that's easier with SFR than with a 4 Fam - most 4F deals I see get bought up by investors with deep pockets, because only with all cash or more than half cash they will still cash flow at current prices. I think its a lot easier to keep adding a few more SFRs until you reach the point where cashflow starts fueling your growth. The other thing I will tell you it is usually not one thing that leads to success, but a combination of many. Get a good deal below FMV, bring some family money, bring some cash. If you buy in good areas you have seen some appreciation and will be able to leverage the equity. If you did not get any appreciation you have to make it up in cash flow. Most investors don't get that and will look for cheap neighborhoods. If you want to see why, just run a cheap 50k SFR and a nice 150K SFR with good school district through the BP calculators and see what happens at 5, 10, 15 years!

Rob Beardsley · Answer

Hi Casey, partners can help you scale but it sounds like you feel that you have a financing issue. This is where marketing comes into play. I would start to reach out to family and friends and get them excited about what you are doing and then offer them a chance to be a part of it. All they have to do is contribute capital and you will continue to do all of the heavy lifting. Good luck!

How to Scale - Milwaukee

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