Plateaued on REI - Out of capital, maxed out borrowing capacity

23 Replies

In the last 2 years, my husband and I have bought two 3-unit multifamily homes - both on FHA loans. We're living in a unit in one of them - the other two units are paying the mortgage and basic utilities. So we're not making money on that one. On the 2nd house that we bought just this past June, we have a cash flow of ~2k/mo. We'll have to keep most, if not all, of that money, however, to do some rehab and repair work on the house within the next year. We're also still paying off my husband's student loans (another $28k to go).

That leaves us in this uncomfortable position where we don't have enough income coming in from our investments to realistically be able to invest in our next property in the near future.  We have 2 mortgages and have maxed out our borrowing capacity from traditional banks.  If we buy in MA again, I don't think we'll be able to get another FHA loan, which means that we'll need a 20% down payment (or 30% if we go commercial) and that seems like a crazy amount of money right now.  We've tried looking for partners amongst our friends, in vain.

I know there are other ways to borrow money - private lending, hard money loans, etc - but I'm also hearing a ton of stories about how we should be getting rid of all our debt, not taking on more.  I have to admit, borrowing more scares the crap out of me.  With the interest rates on these types of loans, it feels like we'll have an insurmountable task ahead of us if we go that route.  

Long story short - we would appreciate any advice we can get on next steps to expedite our journey toward financial freedom and early retirement.  My husband is presently taking real estate classes and will be getting his license shortly.  Hopefully, we'll have more of an inside look on the market once he gets a job in the field.  Thoughts?  Thanks in advance!

@Neha Groves In terms of creativity, you can find money partners and bring your experience to the table. You can also do some whole-selling as a way to generate some cash. Getting a license as your husband is doing now and working with investors will help with earning some extra money as well.

Just a couple quick observations.

When I ran out of or didn't have much capital, I learned all I could about seller financing. Then I targeted tired plex owners that like the monthly cf but not the headaches of ownership. Most of mine were obtained with 10% down at 6% over 24yrs.

Try and separate your loans if you can. Isn't always possible, but don't overburden your credit capacity if you don't have to. 

Limit all consumer debt.  No cc or car payment is worth having now vs what it will cost your future.  Good luck!

Might be wise to slow down a bit on picking up more rentals. Focus on making more money. Potentially look into rehabbing properties and finding money partners as another means to boost your cash reserves. Don't over leverage without substantial cash reserves. As you know if massive capital expenditures pop up, tenants stop paying, ac breaks, roof issues, etc... could find yourself in a tough spot.

@Alina Trigub We are looking for partners, although we're a bit naive in that realm.  We joined BP mostly for this - so that we can find investors and partners to work with.  Once my husband has his license and a job in the field, I will definitely look into ways of getting in as well - possibly complementing my husbands skills and qualifications so that we make a solid team.  Thank you!

@Steve Vaughan - Seller financing is something we've considered, but have a lot to learn in terms of what goes into that and what some of the contingencies and drawbacks are.  Any tips you can share on that would be very appreciated.  We definitely don't want to end up under a mountain of debt in this process.  We're living as frugally as we can to try and save up as much as possible, but with just over $100k gross per year in income from our traditional jobs and kids going to college, it's not easy.  

@Brett Goldsmith - Rehabbing/flipping isn't really our forte.  My husband is a good handy man for small, odd jobs, but not for large-scale construction or remodeling kind of projects.  I don't have any skills on that front either.  I've always felt that there are very rare deals out there wherein you can hire a contractor to do the work (in budget and on time!) and still make a decent margin.  Am I wrong?  Of course, I totally agree with you on keeping reserves for cap ex!

@Neha Groves; I don't know your market, but I'll say that I've never not used a contractor and I get very nice margins and I'm sure many others would say the same. Yes, to find those type of deals, you need to often need to find your own off market deals. 

Sometimes you just have to retrench and shore up what you've got before proceeding. Napoleon (and Hitler, thankfully) outran his supply lines, which was his undoing. He could seize Moscow but not hold it. A capital crunch might be a signal that you should solidify some of your current gains before striving for new ones.

It sounds like you have not had luck with finding what I call 'casual private money investors', meaning friends, co workkers etc.... - people who do NOT do it as a business, but *might* want to take advantage of a good opportunity. 

I would encourage you to listen to every podcast here on BP, starting with the ones that deal wiht private lenders, alternative financing, etc..... 

We ran out of funds at about 25 units (3 of us working together on this) so I made a list of every person I could think of that I was reasonably sure would have at least 30K from cash or retirement funds to invest and had at least some level of familiarity or trust in me and that I thought *might* understand real estate rentals. I came up with a list of about 60, this included friends, neighbors, customers (we are in construction and do a LOT of second or third homes for people) business associates etc.... and 'ranked them' from 1 (hot) to 5 (mostl likely not). Of the first 5 I called 2 have invested, one is interested, one wants to talk in a year or two after he sees how the others go and one is not intersted. 

One other tip I have read a lot here on BP is to go to local REI club meetings and see start relationships with others. We do not have any on our rural area or I would be all over that :-)

Dan Dietz

I would add to what Steven is saying. We have ahead of us in this country a bonanza of small multiplex mom and pop owners with limited skill sets who will be calling it quits in the next few years. Many of them are alienated from their heirs or have heirs who have seen how hard it is firsthand and now have no interest in mom and pop landlording. These owners would love the cashflow without the hassle of ownership. Get good at persuading old people to seller-finance properties they no longer want to own.

@Neha Groves

One thing I realized in my time investing is that getting creative can create growth...as long as it's proceeded with caution.  While I understand using debt to buy more assets sounds scary BUT if the wealthy leverage rather than using cash, why wouldn't you?  In the modern day, you can get really low rates so put the debt to good use and purchase assets that way.  For me personally, my success increased substantially once I stopped fearing debt.  

Sometimes you just have to retrench and shore up what you've got before proceeding. Napoleon (and Hitler, thankfully) outran his supply lines, which was his undoing. He could seize Moscow but not hold it. A capital crunch might be a signal that you should solidify some of your current gains before striving for new ones.

JD Martin

I agree with JD. Shore up your current situation, save some cash.

Apparently Hitler never played Risk when he was a kid. LOL.

i'm in a similar boat. I purchased our first 3 fam my fiancée and I live in with a FHA Loan. we are about to close on our 2nd 3 fam with an fha loan. She is taking her real estate classes later this month to become a realtor for we can get closer to the market. You should start looking into hard money lenders and telling everyone you invest. You will find your next destressed property and refi to pay out the lender. I will partner up with someone who is experienced. Go to meetups in your area to build a network. Reach out to everyone around you and let them know how they can invest in Real estate with a self directed IRA and they can help you with your next property. They are ways we just need to be creative and keep searching. Best of Luck

Originally posted by @Lee Bell :

Sometimes you just have to retrench and shore up what you've got before proceeding. Napoleon (and Hitler, thankfully) outran his supply lines, which was his undoing. He could seize Moscow but not hold it. A capital crunch might be a signal that you should solidify some of your current gains before striving for new ones.

JD Martin

I agree with JD. Shore up your current situation, save some cash.

Apparently Hitler never played Risk when he was a kid. LOL.

 LOL. Risk didn't come out until the 50s - Hitler was long dead or living in Argentina, depending on who you believed.

@Neha Groves does your husband realizes that "jobs" in real estate are 99% of the time self-employed or require experience to do (like Transaction Coordinating, etc)? Also, there is a very real consideration of the increased liability in doing your own deals and also being an "expert in the field", which is what you are considered the second you are licensed. Many companies won't allow or if they do their errors and omissions insurance won't cover personal deals. You also cannot represent both parties to a transaction if you are an agent. In addition, you don't sound like you are doing enough volume to override those concerns if you are trying to save money. You would be much better off finding an experienced, on the ball agent and working closely with them to learn about the market and your options, imho. Best of luck.

You can do a 5% Conventional Home Possible mortgage next which allows buying a 2-4 unit. Atleast in Chicago as of Oct 29th the rules change and you can do this program after already owning other residential property. 

You can use a credit to cover closing costs which I suggest for all my clients who are on a tight budget. For example offering $205,000 with $5000 closing credit vs $200,000 and paying the closing costs yourself. Reduces your out of pocket cash in deal. This amount varies on your local market.