All Forum Posts by: Michael Ealy

 I agree with Joe.

What he means is doing BRRR or value add then refi/cash out.

For example, say your "large sum" of money is $100K.

You buy a house for $70K, put in $30K in rehab, rent it for $1500/mo and now it's worth $150,000. Get 70% of that through a cash out refinance (from a bank), then you get your $100K out to do the next deal.

So, in theory, you don't run out of cash. In theory but it's predicated on the assumption you have excellent deal flow and can get good bank financing (and the bank will allow you to have an unlimited number of loans).

Depending on how large your "large sum of money" is, you can do the BRRR strategy with multi-unit apartment building or hotels. In the commercial world, we call it value-add. That's what I do. In some respects, it's easier than houses because commercial lenders don't care how many loans they give you (but with residential, in the US, their limit is 10 loans). Also, qualifying is more a function of experience, networth, credit and the income of the property itself not so much your personal income.

Hope this helps.

 Thanks Yonah for the mention.

Here's how I lost everything - even became homeless.

Part 1 - https://www.biggerpockets.com/forums/55/topics/690349-from-bankruptcy-to-1-000-units-part-1-thru-the-dark-tunnel

Here's how I rose up and started investing in real estate again.

Part 2 - https://www.biggerpockets.com/forums/55/topics/692382-from-bankruptcy-to-1-000-units-part-2-rising-from-the-ruins

and this is how I went from being financially independent to building my real estate empire!

Part 3 - https://www.biggerpockets.com/forums/48/topics/695243-from-bankruptcy-to-1-000-units-part-3-how-to-build-an-empire

 Hi Junior,

Sorry for not responding sooner.

I got wayyyyy too many responses than I anticipated.

The answer to your question is: YES, it sounds like you have a good 5-year plan. Here are the reasons why:

1. You have a lot of equity built up and more importantly, you have adequate cash reserves. My suggestion is to continue building up that reserves by getting 3-5% of your gross collected rents to that cash reserve account.

2. I always advocate investing close to where you live so you doing that is very smart. 

3. You intend to minimize your taxes when you sell (down to $0) through 1031 exchange and that will save up a ton of your capital for reinvestment

Having said that, here's my suggestion on what you can do to improve your 5-yr plan:

Learn not just the different markets you can invest in San Antonio but also learn how to do VALUE-ADDs (and do so, very cost effectively).

To be honest, that's how I made the most money. I buy apartment buildings (between 20-90 units) that have rents below market, I take over - put in some property improvements and then increase the rents up to market. By doing so, I increase the value significantly.

But, my advantage is vertical integration: I have an in-house construction and renovation team - and it allows me to renovate properties very cost effectively.

So you need to network and find out good GCs or if you want to manage the construction/renovation yourself, find and build a team of contractors. Then find properties that with rents way below market because it needs work and then leverage on your team.

Hope this helps!

 Chris,

It's a long story :)

But here's part 1: I lost everything back in 2002-2003

https://www.biggerpockets.com/forums/55/topics/690349-from-bankruptcy-to-1-000-units-part-1-thru-the-dark-tunnel

From there, is a link to Part 2: how I came back and Part 3: how I built my real estate empire

 Candace,

BP has some free resources like webinars they do on apartment investing.

You can also read books on MF investing. You can search the Multifamily Investing forum here on BP for books that people recommend.

There are also apartment conferences you can attend although those are more expensive (and again, BP members have reviewed some of these conferences in the forums).

Hope this helps.

 Sue, I understand the skepticism. 

I really don't need to post on BP. I have enough passive income and I am retired but I can only coach so many of my kids' sports teams. In fact, the more apartment units you have, the more you can afford professional property managers who will do the work for you so I have free time :)

And by the way, there are a few people here on BP who has more apartment units than I do so I am not the only experienced apartment investor here. To find out who they are, all you need to do is check out the Multifamily investing forums under Commercial Real Estate.

My answer to your skepticism is TWO THINGS:

1. I love real estate investing. SO I continue to do deals. In order to do that, I need three things:

  a. I need to be in touch what's happening in the different real estate markets I am interested in. What better way to know that by networking with real estate investors nationwide

  b. I need to find new deals - and again, by networking with people, some of the people here forward me apartment deals that I can look into

  c. With more deals, I need more capital to acquire them. Some of the people here approach me and they want to invest in my deals.

2. I love to teach and talk to people. Money is very important but money is not everything. When I teach, I get a sense of fulfillment. And again, I know you're skeptical but all you need to do is check the number of my posts and the votes I get for them. The people here on BP who provide a lot of value have a high votes:posts ratio and the reason why I have a very high ratio is because people here on BP, newbie and experienced investors alike, find my replies and posts highly valuable and helpful.

Thanks for the mention Trent.

Apple stock has the following advantages vs. BRRR:

1. It's professionally managed by one of the best leadership teams in the world (whereas your houses are being managed - specially in the beginning - by YOU)

2. It's totally passive (whereas BRRR is a lot of work: finding the deal, getting financing, renovating it or coordinating the rehab, etc)

3. BRRR can be negative cashflow when you lose a tenant or you have unexpected big repair item (unlikely that Apple will ask their investors for money when they have an unexpected expenses)

Having said the above, BRRR's advantages vs. Apple stock are:

1. You're in control, not the stock market, not the trade war with China - everything rises and falls with YOU

2. You get the rental income with a lower tax rate (even zero taxes) due to depreciation (you can't get depreciation write off from dividends from Apple stock)

3. Because of leverage, loan paydown, cashflow and depreciation, you can, in theory make more money than the equivalent investment in Apple stock but it depends on YOUR ability to find the right deal, the ability to manage the renovation and the leasing and ability to get financing

So my advice: get BOTH paper assets like stocks and real estate. The rich have both, although, they tend to focus on one more than the other.

Of course, we real estate investors love real estate.

Lastly, as Trent mentioned, you have to invest conservatively. You make money when you buy - so take the time to find good deals...but also, you need to get trained on property management or at least buy the property cheap enough you can afford to pay for PM.

Leandro,

As we discussed via PM, the key is to first get the KNOWLEDGE on what a good deal looks like.

$2.3M for 23 units could be a good deal or could be overpriced. It depends on the cap rate of the area and the age of the building. You also need to factor the renovation the property needs if any.

Since you said it follows the 1.5% rule, that means your monthly rent is $34,500/month 
Calculation: $2,300,000 x 1.5% = $34,500/month

The age of the building will determine the expense ratio. For instance, if the building is newer (say less than 20 years old), the expense ratio is as low as 40% but if it's an older building (more than 60 years old), the expense ratio can be as high as 60%.

For now, let's take the middle - 50%. So that, your net operating income per month is:

$34,500 (gross rent) x (1- 50% expense ratio) = $17,250/month or $207,000/yr

If the cap rate for similar properties in the area is 10%, the value of the building is:

$207,000/ 10% cap = $2.07 Million , meaning the property is overpriced

But if the cap rate for the area is 5%, this is an awesome deal because the value is $4.14 Million.

Cap rate is dependent on the area/location - the better areas have lower cap rates and bad areas have higher cap rates.

Bottomline: the analysis is as straightforward as 1% rule should be good deals.

Makes sense?

 Thanks Dominic for the encouraging words. This world needs more positive people like you.

I started with a duplex 20 years ago. So you can start where you're comfortable but my advice is scale up as fast as you can. Again, the point of the post is to show that bigger deals don't necessarily mean bigger risks or doing more work. In fact, smaller deals sometime produce more work and the profit is significantly less.

Study BRRR (Buy-Rent-Renovate-Refinance). I was doing BRRR even before the term was invented here on BP. It allows you to scale up because, in theory you can buy as many properties as you can even with a limited starting capital.

Also research value-add strategy for apartments and commercial properties (BRRR is basically value-add but it's not called that in the apartment/commercial real estate investing space). I don't buy any house, apartment or hotel unless I can do a value-add, specially in this market. Doing a value-add means the income from a property will increase substantially which means the value of your property will increase even more significantly.

For example, let's say you have a 20 unit building and it's in a market where the cap rate is 5%. If you can increase the net operating income of that building by just $100/month per unit, the increase in value is HUGE. Here's the math:

$100/mo/u x 20 units x 12 = $24,000

$24,000/yr additional income divide by 5% = $480,000

You just increased the value of the building by almost half a million dollars. You can then refinance or  sell (1031) to pull that cash out and use that to buy a 50 unit building for example.

This strategy is the reason why, even though I lost everything back in 2002-2003, that I was able to recover from that and build a portfolio of 1,000 apartment units today.

 Hi Mary,

One thing I do to scale up faster is to buy properties which are cashflowing already but the income can be increased through increasing the rents/decreasing the expenses. By doing this, the value increase is huge and I can pull out the capital to buy another deal and do it all over again. It's basically BRRR but with apartment buildings and hotels.