First post here. Is adding partners limiting scalability?

11 Replies

Hello everyone,

First post here. 

Backstory:

I am currently putting together a group of 4 friends to begin investing in cash flow properties using the BRRRR strategy this fall in the midwest, preferably Indianapolis to start.

About us: We're all early 20's who have worked together in sales which earn a six figure plus income per year. Our lifestyle has us consistently traveling, and while we make good money it isn't sustainable long term. We are looking to all utilize our income investing in assets which we can grow into something much larger and dedicate ourselves full time. 

My goal is to accumulate essentially 10 properties per person involved. 

I like the fact that by having four people, we essentially can have more people to allocate towards each task while mitigating risk and learning errors in the early stages. 

My only concern is the fact that properties meeting our parameters won't be easy to find or at least not at the start. Each person we add, we diminish our risk per person but also diminish our gain which will lead us searching for additional properties to meet our goals as a group. 

Is limited supply a reason to begin with less partners as it will require us to find less properties to reach our goals? Does having more people to help outweigh the task of finding more supply to purchase as we could explore alternative markets? 


If you just started out with the goals of achieving 10 personal rentals as quickly as possible, would you bring on multiple partners and expand the teams goals of an additional 10 per person or would you stick with as little people as possible allowing a lower requirement of fitting properties to find?

Also if anyone is based out of Indy, I would love to connect. 

@Nick Black there are plenty of opportunities in Indianapolis to go around for 4 of you...there are hundreds (maybe even thousands) of deals out there in one form or another. You didn't mention what sort of properties you were considering and need to identify your strategies and goals before you dive in, of course. The so called BRRRR strategy sounds good on paper (and in a book or podcast) but isn't a slam dunk to attain in Indy as far as I am concerned. Are you looking to cash flow or are you looking for appreciation or??? So called B class properties are popular amongst investors that can afford them and they attract quality tenants but the cash flow (ie rent income to investment ratio) isn't fantastic. C neighborhood properties are much cheaper and cash flow great but are more work. You really need good property management for either class and have to be prepared for more tenant turnover in C class as the tenants are typically more working class with jobs that are less stable than a VP working at Pfizer that might rent a B class property from you.

@Ric Ernst

I definitely agree, BRRRR will more so be the optimal model of what we do but with the supply and how much we would like to acquire then I'm not so sure how many model deals we can find to achieve it but it's something to shoot towards.

After the refinance, even if I leave in 10% of my cash invested then I'll still be making a strong ROI vs. more traditional plays.

Our target market is cash flow strong SFH properties. Any asset appreciation will be a bonus but not factored in on our models for expected returns. We're going to be shooting to diversify a basket of b and c areas, more invested into the c areas hedged with the higher quality tenants in the B neighborhoods.

I have a lot of interest in multi family, but I want to focus on one category first until we get good at it before expanding out there. There’s some duplex’s that I would be interested in if I find an opportunity on them but I don’t want to jump in to anything really larger until we’re more experienced.

Taking a small slice of a growing pie has been a great strategy for me thus far in my career. Sounds like you also have a lot to learn. Stay curious and keep learning.  Combine that with a no quit attitude no matter how many mistakes you make along the way and you will be successful.

Originally posted by @Ric Ernst :

@Nick Black there are plenty of opportunities in Indianapolis to go around for 4 of you...there are hundreds (maybe even thousands) of deals out there in one form or another. You didn't mention what sort of properties you were considering and need to identify your strategies and goals before you dive in, of course. The so called BRRRR strategy sounds good on paper (and in a book or podcast) but isn't a slam dunk to attain in Indy as far as I am concerned. Are you looking to cash flow or are you looking for appreciation or??? So called B class properties are popular amongst investors that can afford them and they attract quality tenants but the cash flow (ie rent income to investment ratio) isn't fantastic. C neighborhood properties are much cheaper and cash flow great but are more work. You really need good property management for either class and have to be prepared for more tenant turnover in C class as the tenants are typically more working class with jobs that are less stable than a VP working at Pfizer that might rent a B class property from you.

agreed BRRR for busy professionals out of state is a receipe for disaster .. I think its about 50 50 in success.. those that get goofed up with it wont post.. only those that sing the praises tend to post and of course locals it works..

 

Originally posted by @Ivan Barratt :

Taking a small slice of a growing pie has been a great strategy for me thus far in my career. Sounds like you also have a lot to learn. Stay curious and keep learning.  Combine that with a no quit attitude no matter how many mistakes you make along the way and you will be successful.

One of my clients was in town yesterday we were looking at the 90 home community we are breaking ground on next week.. and this conversation came up.. and while many can go it alone.. and do fine.. if its very controlled mom pop do it yourself rental type stuff but for bigger deals and bigger portfolio's having QUALITY partners can really save you when things change or markets shift.. spreading the wealth to many I think is a great way to set up a company.. you have to balance paper returns with risk .. so the more you spread out the investor base your personal return goes down of course but your risk factor does as well. and as one who has been at this for a number of decades and rode through some very strong real estate thunderstorms I was glad I was in a 747 and not flying a single engine plane by myself.

 

I have to agree with everyone's very real assessment of the BRRRR strategy. It truly seems like an excellent plan until you get to the point where you have to refinance and no lenders want to deal with you because you are out of state and/or when you do find a lender, the closing fees eat into your equity at an alarming rate because home values are so low. Without sitting down with an actual calculator, to get the proper and safest returns, it seems like you have to snag a home for less than 50% ARV. Quick example: A house in a C neighborhood's ARV is 50K. You pick it up for 25K (50% ARV), rehab it for 20K, refinace it for 37.5K (75% LTV) paying 10% for closing or $3750, and you are left with $1250 in equity.... ?!!? The possibility will exist that you can still get a decent ROI, but don't expect too much from the equity side in this scenario.

I think the biggest challenge for out of state investors using the BRRRR strategy is not being able to recognize what is a good deal quickly enough. Good deals are not a dime a dozen in Indianapolis and sell quickly. Unless you know the areas very well, you;ll spend a lot of time trying to figure out whether it's a good neighborhood or not and what the values are. The key to making BRRRRR work is knowing ARV's and renovation costs so you know how much you can pay going in. If you get either of those 2 things wrong, you run the risk of not being able to refinance out of it.