How to go from deal #1 to deal #2

26 Replies

I finally took the plunge and purchased a buy and hold rental property in Oct 2017. Rehab went a little over budget. Rehab took a little longer than expected. Took a little longer to find a tenant because I believe I slightly overpaid so I wanted slightly higher rent than the area calls for, cash flow ($100) is lower than I expected BUT... I did get it all done  and I have a tenant which leads me to my question.

How do I get money for my second deal? I used up most of my cash reserve for the down payment. I have some money in my 401k and I can get a loan against it for a down payment on my next property. Maybe I can find some private money, but my question is how do I pay for the private money or pay my loan back? The numbers below are an example. It cash flows $180 after everything, but if I did 401k loan, it would cost me $340 a month to pay back that loan ($20,500 over 5 years at 2.875%). So I have loan payment for $340 - $180 leaves me with paying $160 a month for 5 years.  Do I have to find a deal good enough that it cash flows above what I would need to pay for my loan (in this case it would need to cash flow $340)?  And the answer may be to save up the down payment while I sit on this first property. Just wanted to get others opinions.

Example numbers:

Purchase price: 70,000

Down payment: 14,000

Estimated repairs: 1,500 (figuring close to rent ready)

Closing costs: 5,000

Rent: 1,000

P&I plus hold backs: 820 

Cash flow: $180 (10% COC)

So all in for me is : $20,500 (down payment, closing costs, repairs) which I don't have right now.

This is a great question and I’m interested in seeing some experienced members give advice on this. I have not taken the plunge yet and quite easily could be in the same position after my first deal.

Thank you for this question. I too look forward to experienced member responses.

I have been thinking of that for the past couple of weeks. I am struggling to find a way to acquire more money. However, i think real estate investing is all about the snowballing effect. So the first couple of deals are the hardest to fund, since you are probably going to put your own money in. 

The exponential growth of your portfolio if you reinvest your cashflow and save money to acquire houses every years is going to be really good. And if you do that for 3 or so years then the cashflow alone would be able to buy houses for your portfolio.  

This is how is see it:

For this example i am assuming 200 CF every month per house. Assuming houses  are in the 100k price range and that you can save up to 20K a year. 

By year four your portfolio would be buying you a house and onward every year, plus you are going to be building equity.

Year 1 : 1 SFH Annual CF: 2400 Saving: 20,000 - Buy one SFH (20% Down) Remaining: 2400

Year 2: 2 SFH (Annual CF: 4800 Saving: 20,000 + Balance From Last year: 2400) - Buy one SFH (20% Down- 20K) Remaining: 7200

Year 3: 3 SFH (Annual CF: 7200) Saving: 20,000 + Balance From Last year: 7200) - Buy one SFH (20% Down- 20K) Remaining: 14400

Year 4: 4 SFH (Annual CF: 14400) Saving: 20,000 + Balance From Last year: 14400) - Buy two SFH (20% Down- 20K) Remaining: 9800

I am new investor but this is my initial plan. I will try optimize it as i gain more experience since i am going to be building equity and there could be better ways of using it.

Have you included your expenses such cap ex./ pm/vacancy/repairs etc? If not it looks like you are cash flowing negative.
Originally posted by @Richard Beatty :
Have you included your expenses such cap ex./ pm/vacancy/repairs etc?

If not it looks like you are cash flowing negative.

Yes the cash flow is the amount above cap ex/PM/vacancy/repairs.

Originally posted by @Joe Luciano :

This is a great question and I’m interested in seeing some experienced members give advice on this. I have not taken the plunge yet and quite easily could be in the same position after my first deal.

You need to take the plunge.  I feel like that I started small enough so if things we extremely sideways that I could sell the property and get out of it. Now I might take a loss and it might hurt my feelings, but it wouldn't bankrupt me or anything. Knowing that, I took action and made the purchase. I know there are risks involved, but the rewards outweigh that. I'm not one to sit here and think I am going to make millions of dollars in real estate. I am just looking for that financial freedom. If I want to keep my 9-5, I can do that. If I don't, I can do that, too. I just want to get to the point I can choose. Also, I have a family and young kids. I want to be able to make memories with them and I believe real estate can make that happen more than anything else. You can sit there for years debating and analyzing, and then you will look up and your life has passed you by. I know I am not an experienced investor, but no one was when they started. You have to start in order to get there.

Colin - Thanks for the encouragement! We just finished an addition on our home. We still are paying that off. I have a wife and 3 kids and don’t want to risk too much because it has the potential to affect them as well.

I too want to reach financial independence and even want to bring in my daughter (9 y/o) eventually as this may be a good fit for her. She’s borderline special needs and may not end up going to college and I think this would be great for her.

From what I’ve read at BP it’s all about finding the right deal. I really want to take the plunge. The question you posed is exactly what I’m trying to figure out. How do you repeat the process? I want to figure out how to keep the progress going and be able to move on to the next deal instead of sitting around. Hope that makes sense :)

@Colin Leach well you have 3 main ways, one of which is a combination of the other two.

Method 1: save up money from day or full time job and use that for downpayment/rehab. This is likely by far the simplest and easiest way. I use this method. I’ve done this 3 times already and should be doing number 4 this summer.

Method 2: private/hard money lenders. You borrow the money for acquisition and/or rehab and then refinance after you’re done. Typically you’d need to buy under market some. This is typically called BRRR

Method 3: use some form of active real estate such as wholesaling or flipping to earn money. Use this to buy rentals.

Eventually you’ll reach a point where your rentals pay for living expenses and buying new rentals. By my estimation this would take 8-12 years to reach that point, at least for me.

Each one you buy makes the next one easier.

I would advise against borrowing from 401k or leveraging yourself to the hilt. Be patient and be diligent. Sacrifice driving a nice car would be a good example. Stick to a budget to save money.

Do you want the inflated lifestyle or to be an investor? It’s hard to do both when starting out.

If your objective is buy and hold you could use the brrr strategy. That keeps you moving forward with minimal cash needed (You still need some). It sounds like your first purchase wasn' a very good one (low ROI?), but live and learn.

@Caleb Heimsoth   My wife and I do have decent jobs and I believe we could save the money. I just have to do what you mentioned and be patient. That's the tough part sometimes. You read stories of others and listen to podcasts and you hear them talk about buying properties so I get it in my head I want to get another one. I do need to have patience and save the money. I can keep analyzing while I save. 

I am familiar with the BRRR strategy. I thought my first property was going to be exactly that, but my numbers weren't quite right. @Eric James is right. Live and learn. I have made several notes to myself as I go through this process of what to do better next time. You can read this stuff all day long, but taking action and doing it is when you really start learning.

Yeah I've made my share of mistakes....I mean  had learnimg experiences.

@Colin Leach

Do you have any equity built up in the home? cash our refinance would be a good option to come up for a down payment o your next property. So you would want to do a washout refi however you have to make sure that the next property is able to pay for increase on your payment on the first one. So the next thing you buy would have to cashflow very well. 

I am looking to do a HELOC on my current rental and using that money as a down payment on my next investment. But I am keeping in mind that the next property would cash flow enough to give me a ROI in less than 3 years.

Let me know if you have any questions or if I missed anything here. 

Good luck!

Hey Colin, 

Here is an idea...just an idea, which I am thinking about doing for my third deal. Buy a duplex using a FHA 3.5% down. With the FHA you will have to live in it for at least a year I believe. Find another place after the year is up and when you do you will have 3 units instead of 2 and it will be less money down. Best of luck!

Originally posted by @Varinder Kumar :

@Colin Leach

Do you have any equity built up in the home? cash our refinance would be a good option to come up for a down payment o your next property. So you would want to do a washout refi however you have to make sure that the next property is able to pay for increase on your payment on the first one. So the next thing you buy would have to cashflow very well. 

I am looking to do a HELOC on my current rental and using that money as a down payment on my next investment. But I am keeping in mind that the next property would cash flow enough to give me a ROI in less than 3 years.

Let me know if you have any questions or if I missed anything here. 

Good luck!

I didn't buy it well enough to come away with any equity to speak of. That was a lesson learned. My lists of lessons learned keeps growing, but that's a good thing I guess.

@Colin Leach we're in very similar positions. I just acquired a duplex to house-hack in January, but after learning more through reading/listening/observing mostly BP content, my deal seems average to me. It could be great depending on how the market moves, but we'll know with time. 

Like you, I'm also finding it difficult to be patient and am yearning to buy another. But, I think as you noted, we've both come to the same conclusion in that :

  1. There's a lot to be learned 
  2. Being patient will pay dividends 
  3. As we wait, we can be diligent in finding great properties that meet our criteria. 
  4. And, if we can't be patient, we'll find methods of being financially creative to acquire another sooner, such as what @Cameron Whitehead and @Varinder Kumar noted.

This is a great time for us to learn the tough lessons of land lording, refining our criteria, searching for awesome deals, and learning about how to creatively finance. 

Congrats on getting in the game, and let's keep forging forward! 

@Colin Leach

Caleb mentioned some of the core principles.  House hacking may not be an option since you mentioned you have young kids which means you will be looking for better schools and there may not be tons of multi-family options in those neighborhoods.

A few other options:  

In lieu of taking a loan on the 401k , limit those contributions to get the employer match, or stop contributing altogether.  Use the balance to accelerate your savings for another property. 

If you have an IRA - Consider converting to a self-directed IRA where you can invest in real estate.

Consider renting - You may be able to find a home that rents for less than your current mortgage and use the balance to accelerate your savings. 

Good luck 

@Chirag Shah ... Patience is key for us. Mainly because as was mentioned I don’t want to become over leveraged where the slightest thing could cause major set backs. I will work with the property I have and keep looking and saving. 

@Milton Rivera I wish someone had told me about house hacking 15 years ago when I was single but now I am sitting here with 4 kids so I feel that has passed me by. That’s ok though. I make sure I tell all the young people I know so they can have that opportunity. I am going to tighten up the budget and continuing saving. While my unit was vacant I was covering the mortgage so now I should be able to save all that money. 

@Colin  Leach

You asked a great question, something that I have been wondering about myself. More than that though you have taken action and now have positive cash flow to put towards your next purchase. Perhaps you can increase your rent or maybe the tax benefits will allow you to save money a little quicker this time. Anyways kudos and good luck.

Wholesale properties, use a private money lender, find a cash partner etc.

@Colin Leach First, congratulations on taking the plunge. Many never do!

Now, first thing first, you should outline what you think you could better on the second deal based on what you learned from the first deal so that you stay on budget and time. 

This lessons learned step is absolutely critical before moving onto the next deal, especially if you're still thinking of how to raise the capital. 

Three options to consider

  1. Get an appraisal for the first deal to see if there is room to pull out equity 
  2. Lease option your first deal when the tenancy expires [get the 20k from that tenant] - Patience can be good
  3. Do nothing and save for the next one 

With other peoples' money, there should be a certain level of financial stewardship and fiscal responsibility that come with it. Consequently, you should make sure that you are confident to take that leap into the realm of using OPM.

Hope this helps. Goodluck. Thanks! - Ola

@Colin Leach Give it some time since you just bought your first rental. If you're strapped for cash, it may be best to just start saving up again. Keep your eyes out for opportunities. If you find a good deal, you can always bring in a partner and/or private lender. Good luck! 

Originally posted by @Rachel H.:

@Colin Leach Give it some time since you just bought your first rental. If you're strapped for cash, it may be best to just start saving up again. Keep your eyes out for opportunities. If you find a good deal, you can always bring in a partner and/or private lender. Good luck! 

 I am going to work on saving up for the next down payment. It's just being patient is the hard part.

You need to truly find a good deal (BRRRR scenario), that way you get your cash back and have a property with 20-25% of equity in it. You could also just borrow money and then hope your C-o-C is over and above the cost of money, but what about the 2-to-3 jump in the future?

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