All Forum Posts by: Lucas Mills

Hi Matt -

Very good points. Forgive me if I didn't explain myself adequately in the posts above, but suffice to say that I would never purchase a house with that purchase price to rent ratio; at least not at the price of 100k. If we're talking 200k, then maybe, because expenses will probably not linearly increase with the purchase price, thus allowing for increased monthly cash flow.

Secondly, even if I did decide to go for the 100k house, I certainly wouldn't sink 20k of my hard-earned dollars into it. I would only do this deal if I was able to purchase the property for ~50k (either via hard or private money), assuming it needed 20k worth of rehab, and appraised at 100k, thus allowing me to cash out and pull the initial investment plus fees back out. The whole time I would retain my 30k for the purpose of cash reserves to be used when and if any number of those things you mentioned were to happen.

So, in short, I realize and understand the importance of cash reserves, and will not leave myself without. That means that I will either be saving up to a larger amount (50k+), and/or using hard/private money to finance deals via BRRRR strategy.

Hi Kyle -

Some good advice here.

I hear all of that, and it is what I'm afraid of, as well. Like you said, there are many things that can go wrong, and its especially daunting given that I have no networking in any other area than where I live. At least here in Springfield, I know several investors who can refer me to the right people if need be, and I feel confident investing here.

Except, the cash flow just isn't that great here. So, what am I supposed to do? I can't buy a few turnkeys because that requires downpayment and if we're talking 10k-20k per turnkey, I'm going to run out of money before I get my second property. And I can't exactly practice the BRRRR locally because, well, I would be wasting my money on a deal that doesn't cash flow the way that I want it to.

Where does that leave me? That's the conundrum I'm currently finding myself in. My ideal situation would be to either save up to 50k-60k or enough to do a BRRRR all by myself, and then churn out 4 or so properties a year by re-using the same chunk of money over and over, pulling it back out at the refinance each time. That, or to find a private investor who will let me use his/her money to do the same. Or, I could pursue hard money whilst working towards the former two options. I'm ready to go, and to make something happen, but I'm not going to waste my money on bad deals (for me) here where I live. I just don't know how to proceed otherwise, specifically because of the concerns that you mentioned.

Hi Jennifer -

Yes, that all makes sense. Are you primarily buying turnkey properties when they're out of state?

I've been evaluating my current situation as it relates to what I need to accomplish next in order to get closer to my first property acquisition. My town doesn't seem good for cash flow, and I feel like I need to be looking elsewhere, but, I have no experience doing this locally, and much less so anywhere else. At least locally, I know some of the investors here and have done some networking. I also had a duplex under contract a few months ago but backed out due to high flood insurance rates. Just not entirely sure where to go from here, seeing as how my city doesn't seem to offer many cash flowing options.

If you're interested/have time, I posted a bit more about it here.

Hey John, how's the market there in Texas?

Do you have any experience with investing out of city/state? The market here in Springfield, MO does not seem conducive to cash flow, so I'm trying to figure out where I should be looking otherwise. I had had an offer accepted on a duplex here, which would've cash flowed to at least some degree, but ended up backing out due to being unable to find decent flood insurance rates for the property. That, and I didn't want to undertake such risk at the forefront of my entry into REI. I am ready to get started with this thing, but I have some hurdles to get over. Such as, not having really any idea where I should begin when seeking to perform the BRRRR in another state where I have zero experience, zero networking, etc.

Are cash flow and appreciation mutually exclusive? In other words, what I think you're saying is that you wouldn't invest solely in the "cash cow" type of properties in bad parts of town (which likely does not hold as much potential for appreciation), instead favoring properties in decent neighborhoods that show promise for the future, and thus, appreciation.

I've posted about this before but I don't feel that a reasonable and sufficient conclusion was ever reached, at least not on my part.

I have not yet done any deals. I currently work 8-5, have about 30k in the bank, and want to transition from my w2 job to real estate.

Ultimately, I want to be a very passive investor wherein I have the choice to grow my investments, or take a couple months off to do... whatever. I can live comfortably on 3k/month which translates into 20 properties cash flowing at $150/month, or 15 properties cash flowing at $200/month.

The confusion for me lies here - in my mind, when I purchase a property, it should effectively be able to sustain itself. I don't want to have to worry about contributing a single cent to the property in order to cover an expense. Of course, this may be necessary in the short-term, due to the fact that the cap ex reserves for that property won't have accumulated significantly for a few years, but that's ok.

However, over time, I want the income of the property to be greater than the expenses. Otherwise, what's the point? If my properties are continually draining their own reserves over a long period of time, then, eventually, I will end up with no cash reserves and will have to think about working a w2 once again just to pay for expenses and keep the properties afloat.

At least, potentially, until the time comes when the properties are paid off (~25 years into the future) and I receive an instant boost in cash flow, around $200-$300 per property. But, I don't want to wait 25 years until the properties are paid off to feel like I can work as little or as much as I like. I also don't want to operate under the assumption that I will be able to increase rent over the coming years to accommodate lack of cash flow in the here and now.

To that end, I have been trying to determine exactly how much of the cash flow needs to be dedicated to capital expenditures in order to ensure that my cash reserves do not run out, provided that I have no other income streams than my rental properties. I have read this article which breaks it down in a very easy-to-understand manner, and suggests that an amount of $182.75 be allotted each month to cap ex reserves to cover replacement of all of the discussed items.

Now, if you ask any investor in my area how much they dedicate to cap ex I can absolutely guarantee you that it is not this much. I think somewhere around $50 - $100 is probably more in line with what they are allotting for cap ex on a monthly basis. But, they can do this because they have separate businesses and other income streams. If a roof goes out, no big deal - just wholesale a house to pay for it. The thing is, I don't want to have to worry about doing something like this to cover an expense.

So, if that's the case, then do I need to more closely align myself and my criteria with what that article suggests, and make sure that I do not skimp on the cap ex?

Of course, there are more considerations. What if, for example, we take away everything from that list with a life span greater than 25 years (when the mortgage would be paid off)? In that case, the monthly cap ex allotment would be $141. Not a far cry from $182, but it improves cash flow a bit. The idea here being, that these things would likely not need to be addressed until after the mortgage is paid off, at which point cash flow will increase somewhat dramatically. But is this a safe way to think?

All in all, what I want is to be able to work as little as I want without having to worry about paying for expenses that my properties will incur. So, I guess what I'm wanting to know is how should I reasonably prepare for this without simultaneously being too conservative and passing on deals because I don't fully understand how this will play out over the long term?

I am ready to begin the process to liberating myself from the 8-5. I have a plan in place and a set of fairly specific criteria in order to get there. Here it is at a glace:

* 3k in monthly cash flow = 15 properties at $200/month or 20 properties at $150/month. Am open to larger properties (such as 10-unit+ apartment complexes, etc.) but do not think I could currently qualify for a loan on such a property at the time of refinance (assuming BRRRR), even if I could find a private investor to make the original purchase for me.

* Looking at BRRRR strategy as a way to more quickly scale property acquisition due to limited capital

* Seeking private investor to assist with increased property acquisition as time progresses

* Ultimately seeking passive investments that require little to no attention which will provide income stream

* Looking to accomplish 3k of passive, cash flow income within the span of 3-5 years

I have a few obstacles as I perceive them. For one, I don't have a ton of capital. I have about 30k of my own money saved up right now. Turnkey is attractive, but I don't want to blow it all on one or two properties and then not have any cash to continue the process with while I continue to work another 1.5 years or so to save that amount up again. That would significantly delay the timeline in terms of achieving my goals. To that end, the BRRRR strategy seems most advantageous, to me, so that I could keep re-using the same chunk of money over and over. Furthermore, finding a private investor, or perhaps at first, using hard money, also sounds like a good option in order to scale property acquisition more quickly.

Another obstacle is that my town is not good for cash flow. Investors in the area tell me that you are doing well to get a property that cash flows 200 bucks after the mortgage payment, taxes, and insurance. They're not even including any variable expenses when they say this (vacancy, repairs, cap ex, property management). So unless I have stellar deals, investing in my own town seems like a poor choice given the landscape here.

Which leads me to my next obstacle; figuring out how to invest out-of-city/state. Sure, I can pull up the MLS and browse properties anywhere in the US, but there are so many places to choose from; I have literally no point of reference in terms of where to start. Furthermore, while deals can (apparently) be found on the MLS in certain areas, it seems to me that being networked with wholesalers and other investors in the area is a big deal in terms of getting good deals. So how exactly am I supposed to network with people in a remote location hours away from me? My first thought would be to figure out when/where the local REA is meeting and take a day or two off from work to attend and network... Other than that, I have no idea.

Finally, if I want to execute BRRRR in a remote area, I will need to figure out how to find/use subcontractors. I haven't even yet addressed this in my own town (figured out who I would use), let alone another area. This may be solved by networking as described in the earlier step, but it seems like another separate issue as well.

All in all, I feel like there are a lot of obstacles to overcome in order to begin on this journey. I need to be able to acquire at least 4 properties per year that cash flow at least $150-$200 after all expenses. And I can't do this in my own town, at least not readily. So I'm not entirely sure what the next step is at this point.

If I could purchase a property in my town for a price that would accommodate the rehab budget, and all other expenses, and leave me with $150 - $200 in cash flow at the end of the month, I'd be doing it right now. I have all of the resources and support system here in my town to make me feel comfortable with pursuing this immediately. However, on the properties that cash flow in my town (typically 50k and below SFH), there just isn't enough meat left on the bone. Capital expenses seem to be the killer here, since they aren't so directly correlated with income. So cap ex on the smaller properties takes a much bigger chunk out of the cash flow than on relatively similar properties in other areas with higher rents, and thus, a higher gross income.

Congrats, and great work.

A few questions:

1. How did you find the apartments and the 4-plex?

2. What do your variable expenses look like on the 4-plex and the apartments (e.g., vacancy, repairs, cap ex, property management).

3. What kind of rehab did the 4-plex and the apartments require?

4. You said that you did all of the rehab work yourself... What experience do you have in construction or rehab, if any? Or is this "easy stuff" we're talking about like paint and the like? I'm trying to ascertain at which point I should consider seeking help from a subcontractor, as I have absolutely zero rehab experience.

5. Exactly how much of your own capital was required to purchase the 4-plex and the two apartments including downpayment, closing costs, rehab budget, etc.? Did you have all of this capital already put back in the bank? How long did it take you to save up the necessary capital for these acquisitions?

6. How much actual cash flow do you have at this point? I.e., how much cash is left over at the end of the month after ALL expenses (including variable) have been accounted for? While you have 4k of gross rental income, a large chunk of that is obviously going to mortgage payments, insurance, property taxes, and then of course all variable expenses. So what are you actually allotting for yourself in terms of livable income?

7. How much cash reserves did you have during your acquisitions?

I want to also liberate myself from the 8-5 and follow a similar path. But, I have a few obstacles as I perceive them. For one, I don't have a ton of capital. I have about 30k of my own money saved up right now. I don't want to blow it all on one or two properties and then not have any cash to continue the process with while I continue to work another 1.5 years or so to save that amount up again. To that end, the BRRRR strategy seems most advantageous, to me, so that I could keep re-using the same chunk of money over and over. Furthermore, finding a private investor also sounds like a great option, in order to scale property acquisition more quickly.

For two, my town isn't good for cash flow (apparently you're doing well if you get $200 after mortgage payment, taxes, and insurance -- this has been told to me by more than one local investor).

Three, I have zero experience with rehab or subcontractors. This seems to be made even more harrowing by the thought of investing out-of-town.

So while I have a fairly specific goal and set of criteria, I'm still trying to figure out exactly how to get there. Those are my obstacles right now.

Right. I googled "mutualism" and a quick look implies that it's closely related to socialism.

Thanks guys. I've reached similar conclusions already.

I don't see anything morally or ethically wrong with what (good) investors/landlords are doing, in terms of profiting from cash flow.