Newbie - How do I structure this in order to cash flow?

Question

I am new to real estate investing and hoping to get my feet wet with my first deal sometime in 2018. My goal is to use the BRRRR method with multi family properties here in the Dallas - Fort Worth market.

I am having a bit of trouble structuring my deals to achieve cash flow. I only have about $3-5k that I'd be willing to use as a down payment. However, my Dad and his business partner are willing to help me get started. My dad's business partner is a multi millionaire and could easily fund entire deals. But having no down payment keeps me pigeon-holed into very small cash flow. My Dad and I have talked about having his business partner front the down payment and getting a bank mortgage, and then splitting the cash flow and equity 50/50 between me and my Dad. But this still seems like it would end up eating up our cash flow as we have to pay back his business partner somehow.

Has anyone had a similar situation and found a creative work-around? Any input or resources you could recommend would be greatly appreciated!

Blessings,

Blake

Rick Pozos · Answer

YOu are probably having trouble cash flowing a property because you are not buying it cheap enough. When someone wants 250k for a property and it rents for 1500, its not a deal. If you could get the property for about 150k and make it look really nice, then rent it for 1700 or 1900, then you might have a deal.

Price is usually the first issue. If it is not over the 1% rule, dont even waste your time.

John Leavelle · Answer

Howdy @Blake Davis

If you are wanting to use the BRRRR strategy forget about using a Bank Mortgage to acquire the property.  The type of property you should be looking for should be distressed and may not meet the lenders livability standards.  If possible have your dad’s business partner finance the entire deal as a Private Lender.  You can pay him interest only payments until you have the property Rehabbed, Rented, and Refinanced.  At which time you payoff his loan.  You can pay him 10% to 12% Interest (or whatever you negotiate).

If you are having trouble achieving cash flow post some of your analysis here so we can help you figure out what the problem is.

Joe Villeneuve · Answer

The bigger the down payment, using your cash, the further away from cash flow you get.  Remember, before you can make any cash flow, you have to catch up to any money (cash) you put in from the beginning.  Putting up a larger DP to get bigger CF is an illusion.  All you are doing is paying all your negative CF up front.

Wendy Patton · Answer

Warning in TX it is not recommended to sell on a lease option.  Now to buy on an option...... likely just fine.   Sorry it is some state rules that were created about 13 years ago that make it nearly impossible to sell using a lease option.

Joe Splitrock · Answer

@Blake Davis you need to find a better deal. The property should cash flow with 100% financing. Let's run a hypothetical:

$100,000 property value

$1000 monthly rent

Expenses using 50% rule are $500 (includes everything but mortgage)

Mortgage of $100K is around $500 payment for 30 year fixed

As you can see in this example with no money down the property basically breaks even. Property meets the 1% rule. People will argue if the 50% expenses is too high and that properties meeting the 1% rule are hard to find. The point still stands that without a down payment, you need to find a better deal.

Bart H. · Answer

Monthly rent/purchase price >= 1%

Peter M. · Answer

You could do a lease option or lease option sandwich. Never done it myself but I am reading a book now where the investors utilize it. Finding the property would be your only problem. Plus you would have to have a lawyer do the contracts because TREC does not have a promulgated form for lease options or subject to financing. In the book they did all of this pre-08 crash and I have not yet researched if it is still doable but it certainly intrigued me.

Essentially what you do it find someone willing to either owner finance or let you take over their payments for a small down payment ($0-5K which you have) with an option to purchase the property at a later date. You then rent the property for more than you're paying on the mortgage. So you are essentially leasing the property with an option to buy but technically own it even though their name is still on the deed (i am fuzzy on the legal details here). A sandwich would be if you give the tenant you put in an option to buy as well. You require a large down payment like what you paid the original seller to get your investment back and you set the sale price higher than your buy price with the original owner. If your tenant exercises his option, you exercise yours and pocket the difference. If they don't, you keep their down payment and do it again.

If you try it let me know if it works out. Definitely easier to write about than actually accomplish. Honestly though, DFW is tough to cash flow (not impossible) in this market and if you have someone like your dad's friend it may be the best way to go simply because you already have the relationship and its quicker than banks and hard money. Good luck.

Josh Engelhart · Answer

Borrow all of the money from him. Buy a broken ugly house at a low price. Fix it (with his money.) Sell or refinance all of his money or more back out.

He would benefit from either you paying him interest or some of the profit from the sale or refinance.

Newbie - How do I structure this in order to cash flow?

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