Financing reality

[Bobby C.]

All, I am posting this in order to see how realistic I should be about my investing goals. I currently have 2 SFR's, one through an FHA loan and one acquired with cash earlier this year. Both will be rented by next month and I will be taking in a good cash flow from them. My plan is to put a mortgage on the home I bought with cash, I should be able to take out around $50k and I will use this as a down payment on another larger multi-family or buy another SFR that can cash flow just as well as the other two. I do not have the best credit but have not had any negatives since around 2007 when I hit a bad spot. My score is around 630-650 with the 3 agencies. How realistic am I being that I would be able to take out 2 mortgages in the next 6 months or so as an investor? I am on a bit of a time crunch as I believe that the job I work at may not be around in the next year, and plan on using my investments to help replace my income. Thank you in advance

[Adam Johnson]

I am going to offer a couple of alternative thoughts for you, primarily because you mention a possible layoff coming. If your goal is to supplement income (or lack of), you may want to consider what the Principal and interest portion of your new mortgage to see if that is going to be helpful enough to bridge you through unemployment. You might consider that alternative before signing up for more debt.

Another idea if you do decide to cash out, save the cash in reserve and try to do deals with as little, or no, money down as you can get away with. Conserve cash as an emergency fund.

A couple warnings to consider - try to avoid living off of the cash you pull back out if you do refinance! Once it is spent, it is gone and you still have to pay it back. Also, unless you score the deal of a lifetime, putting the cash out back into a property (or several) is not likely to give you adequate cash flow to live off of exclusively. You want to avoid pulling TOO much out of your cash flow for living expenses, only to find that in a year or 2 your properties have suffered from severe lack of maintenance and you now have little or no means to pay to get caught up.

Generally I am very aggressive with leverage. Because you mentioned a possible layoff coming as well as mentioning only 2 properties, I offer these words of caution and recommend a more conservative approach.

Here is a quick exercise for you that might help. Calculate your living expenses on a monthly basis. Be realistic and honest. Next, calculate your monthly cash flow off of your 2 properties. Note that cash flow and profit/loss numbers aren't the same. Cash flow is what is left after mortgages are paid, utilities, taxes and other expenses are paid, and AFTER you have set aside or otherwise accounted for factors such as maintenance and vacancy loss. Don't kid yourself either. Just because you didn't have to fix anything this month, doesn't mean something big won't break next month or a tenant pulls a midnight move-out on you. Compare the 2 numbers. My guess is that you will rub your eyes a couple times. That is reality.

I am approaching 20 units now and still don't have enough cash flow to replace my "day job" income. By the end of the year I will be at 40 units with what I have under contract and then I can start thinking about it. My units cash flow well, even after factoring in vacancy and repair allowances.

I offer these thoughts not to discourage you. Keep going, but be careful not to back yourself into a corner! I have purchased several properties from owners that have basically done what I am warning you about. Operating rental properties take some volume to live off of and I question if 2 properties are enough, especially with mortgages on one or both