Down payments and scaling
Member since 2018 · 36 posts · 4 votes
What are some of the better strategies to purchase properties and manage the 20-25% down payment per property? In other words, I'm using a HELOC for my down payment. I can only do one, maybe two deals at a time using the HELOC for my down payment. What other options are out there for scaling your business AND putting a significant chunk of cash down each time. Thanks in advance.
@Scott Duerk I am investor and also a business developer for a property management company in Indianapolis. Most of our clients are out of state and many are investing with home equity vehicles, like your HELOC, or retirement vehicles, like self-directed IRA's. You have a few options with your HELOC that you can consider.
You can also research Air BNB models, Senior Assisted Living models, Note investing models, Syndicate and JV models, or a variety of other opportunities. I highly recommend reading everything you can find, visit some meet-ups and REIA's, network here and on other social media platforms, and find a mentor or do a joint-venture with a more seasoned investor. The first few are always valuable lessons and partnering with someone with experience can make a huge difference in the learning curve and overall profitability.
Your best option is the BRRRRR strategy so you can ultimately get that down payment back for another deal.
If you're buying turnkey and not value-add then the down payment will unfortunately be stuck tied up in the deal.
Value-add is hands down the best way to recycle capital and scale otherwise you'll be stuck when initial funds run out.
@Brian Garrett Thanks for your reply. What about partnering with other investors for the down payment in exchange for equity in the deal? Have you done this before or do you prefer to have 100% of the pie as opposed to 80%?
@Scott Duerk I am investor and also a business developer for a property management company in Indianapolis. Most of our clients are out of state and many are investing with home equity vehicles, like your HELOC, or retirement vehicles, like self-directed IRA's. You have a few options with your HELOC that you can consider.
You can also research Air BNB models, Senior Assisted Living models, Note investing models, Syndicate and JV models, or a variety of other opportunities. I highly recommend reading everything you can find, visit some meet-ups and REIA's, network here and on other social media platforms, and find a mentor or do a joint-venture with a more seasoned investor. The first few are always valuable lessons and partnering with someone with experience can make a huge difference in the learning curve and overall profitability.
@Ross Denman Many thanks for your time. I'm in South Carolina and we do have a local CREIA group that meets next week. I look forward to joining this group and start networking. Appreciate the insight and the many different strategies you've presented. Very valuable information.
What are some of the better strategies to purchase properties and manage the 20-25% down payment per property? In other words, I'm using a HELOC for my down payment. I can only do one, maybe two deals at a time using the HELOC for my down payment. What other options are out there for scaling your business AND putting a significant chunk of cash down each time. Thanks in advance.
B = Buy
R = Renovate
R = Rent
R = Refinance
R = Repeat
@Scott Duerk, I'm not sure how many homes your line of credit can purchase, but lets pretend that you can purchase 5 before running out of money. If your 5 homes appreciate at 3% each year, and you are leveraged at 5 to 1 (20% down) each house is growing at 15% return in comparison to the money needed for the down payment. Five of these homes actually returns 75% of the cost of your next down payment in equity growth every year and gets more each year. Of course another refinance will only allow you to access 75%-80% (LTV max) of the equity, in 2 years, you should be able to refinance the equity in the portfolio to cash out enough for another down payment. After that, you should be able to grow your portfolio every year just by reinvesting the equity growth.
It really depends on how you're positioned. I have a local client with 12 SFR's on one commercial portfolio note. Each one of his properties appreciate an average of $2,500-$4,000 annually. He "absorbs" a new deal with the equity growth from his portfolio each year. He actually purchased two this year. He's averaging about $30-$35k in growth each year and that's enough for a new down payment on the next one.
While a lot of people push BRRRR strategies, you do have to understand their short-comings. Mainly, cash flow is drastically reduced meaning you have to keep liquid reserves available for operating costs. I figure uninvested money held for reserves as part of my total investment costs, meaning that no BRRRR is actually an "infinite rate of return" the way that people like to pitch it. If you don't have reserves available, you will likely fail when building a portfolio using just the BRRRR method.
However you decide to do it... you will have to leverage the capital that you have. You can be successful, but it will take time to build. As you continue to add to your portfolio and let the equity grow and the cash flow build up, you will find that it becomes the backbone of much of your financial resources.
@Scott Duerk where do you invest in the upstate? I’ll have to look for you Monday night. I’m sure it will be pretty busy Monday night, last year was.
@John Hovanec I'm just getting started so no properties acquired as of yet. Learning as much as I can. I look forward to meeting you!
@Ross Denman I really appreciate your perspective and input. I'm hesitant to start a BRRRR for my first deal as I've not flipped a house before. As such, I feel like it will be a while before I'm ready to undertake a project like that with limited experience in that space. I'd love to do a deal with a more seasoned investor so perhaps something like that will open up in the future.
While I want to scale and grow quickly, I know that slow and steady wins the race, especially being able to do so and avoid bankruptcy... Many thanks. Scott
I know that there are a lot of people on the site who have grown through the first few deals and are asking this same question. There are some great answers above! @Ross Denman, I like your vision.
I have done a number of fix and flips, and really like the flip 3 and keep the 4th model.
And on the buy and hold side, as well, my portfolio is much like you describe, where the porftolio rent and appreciation tick over on about that time frame, even in our lateral trending markets. I find when I hold rentals for cash flow, 4 mortgaged rentals pay for the mortgage on the 5th.
@Kerry Baird How did you get started in the fix and flips? As I stated earlier, I'm too much of a novice right now to START with a BRRRR or Flip a house but I see the merits and would be interested in the future.
@Kerry Baird How did you get started in the fix and flips? As I stated earlier, I'm n
Scott, another great tool is owner financing. You can get into a property with little to 0 money down and save your capital for work needed instead. Hard to convince multi units to owner finance because they would probably make more money with the rent coming in then they would your payment, unless it was uninhabitable. Very good strategy for SFR though. If you figure out a good technique for your housing market, get in with 0% down, with little work you could potentially scale VERY VERY fast! But like I said depends on your housing market and the price point. Here on Long Island houses are expensive and usually want some skin in the game but still a lot better deal sometimes then going 25% in and getting stuck waiting to save capital just to rehab and pull back out. Hopefully this helps! Anymore questions shoot me a message!
Thanks @Nick Calamia Great advice. I had briefly considered this but it hasn’t been mentioned before your post. Really appreciate your thoughts.
Another question for you with a HELOC. I have a chance to secure much more equity on my home with a higher LTV ratio. However the interest is .75 points higher. Would you want access to more cash but at a higher price or less cash that's less expensive?
Good question! Really depends on your situation and style investing. I love buy and holds, so to me I don't really have the intention of selling right away, so equity isn't my play it's cashflow. So as long as the cashflow meets my criteria I can live with that even if the bank wants to bang me a bit for it on the interest. Me personally I would rather have more cash on hand for either more downpayments, rehab costs, or emergency funds for vacancies, etc. At the end of the day the bank is a business and they are going to try to get their money anyway, it is just the price of doing business same as you would pay a hard money lender to do a flip. There is no right or wrong answer but I would rather have enough to buy property 2 and cashflow that then just have unusable equity in a house if I can't refi it out of the property just to pay to refi it out anyways down the road!
As young military troops, we had higher ranking folks recommend we buy a house at every station. All we could afford were light fixers. We bought one in England, and saved up for a new kitchen and sound proof windows (we were near the flight line). And when our tour was done, we sold that one (since it was overseas, we didn’t rent it out).
We bought the next house at the next station. We added value, and rented it out, while buying another fixer to occupy. While doing up that house, we found an investor friendly Realtor and bought a couple of houses nearby using gains from the previous houses, and every penny we could save up from salary. I painted them, put carpet in and rented them out. We’ve always done a blend of some hands-on (I paint, hubby swaps out light switches and fixtures), and we hire out almost everything else.
I got out of the service to be Mom, and just took my kids along to look at houses, to help me clean or paint. My eldest had a share in a house when she was 16 :D
@Kerry Baird Great story. So your fix and flip homes don’t seem to have been in that bad of shape. Am I right?
Thank you for your service!
@Scott Duerk, thanks! You are right that most of our fixer houses have been flooring/paint/kitchen remodels. We have encountered a few rough ones, too.
Here is the link to my blog. This house, which we moved into a few months ago, was pretty bad a year ago. It had structual damage caused by termites, also had rat nests and associated damage, and plenty of water intrusion.
@Scott Duerk, I employed a similar strategy on my first investment as already mentioned above. I used BRRRR method, put 20% down with a HELOC and financed the rest through a HML or private lender. You can build in construction costs into the borrowed funds by getting all the contract estimates and supplying those details to the lenders. When you finally refinance with a bank, you pay back your lender (including construction costs) and pay back your heloc. If you even break even, you have a property and all your money back for the next deal.