Roadblocks to my goal of scaling faster

[Nathan R Andersen]

Bigger Pockets community

I come here to post a ridiculous wall of text with a few questions to help me in my quest to financial freedom, wealth, and supporting my spouse. Let me lay out some details below, some of my plans, and some of my problems or future road blocks to see what all of your collective knowledge can solve.

Background: 

My wife came from homelessness and was driven to earn her doctorate. She works a killer w2 job that makes us a good living. She also wants help with the financial burden she bears. I run a plant nursery from my home to be home with our 3 kids and help provide some cash here and there, but it isn’t sufficient to feel that she is being provided for (reasonably so, I get it). My quest is to provide through real estate.

*790 Credit score, rough DTI due to wife student loans (hopefully forgiven from Public service loan forgiveness in 2 years)*

We live in SoCal, have a home worth 500k roughly, bought it for 259k 6 years ago and a 150k HELOC on it atm. We are under contract for two 4-plexes (Indiana and Maine) and have spent 60k~ on down payments. We have figured around 9k in cash flow through year 1. We'll be using that cash flow to pay back the HELOC for the first few years (hopefully 3-4 as we overcalculate for repairs, capex, and other expenses to be conservative)

Plans: 

My plans are to hopefully scale much faster than buying two more 4-plexus and just sitting on it until we pay back the HELOC and then buy some more. My initial plan was to buy a property, combine the cash flow and hopefully pay it back faster. Then once I lower the HELOC enough buy another and so on. I see this as a decent plan for 20 years as I can build my money's velocity as time goes.

I would love to do things like BRRRR with the remaining 80k~, find a way to partner with someone to speed things up, creative financing, seller financing, and possibly flip or do other things. The problem is cash flow is harder to find, and deals I come across either are too much to finance at a higher rate (not to mention the HELOC interest payment), or are great buys for 3-5 years down the road and will appreciate quite a bit. I've tried to come up with ways to make this work, but I'm coming up with a good idea and it falls short of something, like cash flow lol. I'm having a hard time putting the last pieces in the puzzle. This also is a bit harder because the cash flow we DO have coming in is used to repay the HELOC (the interest is included in the underwriting), so I don't feel comfortable investing into a net neutral and appreciation gaining market/deal.

Example: I think "Maybe I could partner with someone that could house hack and I could fund the operation with the HELOC!" then I can't seem to figure out a good way to split the equity/profit with them to make it work. I have the HELOC interest only payment I need to pay, and a way to pay the HELOC back. Can I split the profits 50/50 once the HELOC is paid back and we factor the interest payment into the underwriting? This takes advantage of a lower down payment, but leaves the live in person to make a payment that funds the cashflow, otherwise it doesn't make money until they leave. Who is funding repairs? Etc. This just seems like a great situation for them to do without me, because I'm not adding much value. I'm not sure this is a great partnership.

Questions:

Does getting a partner seem like the only way to scale quicker than I want?

Is there a way to setup a partnership where I can still cash flow up front? What am I missing?

Am I doing something wrong or in the wrong market when I’m analyzing BRRRRs and barely cash flowing if at all, or are possible value add and refi out some money, but negative cash flow for 3 years at like -$300/month?

I also don't know if I'm looking at 5+ unit properties properly, but they seem to not cash flow for me, even though they tend to be priced based on cap rate and debt service coverage. (example, 700k for 7 unit with room to expand, NOI of 74k, but the debt service would be 73,568 because I would only have 10% down. I'm asking for creative/seller financing, but 1031 is making it difficult)

Tell me where you see a lack of logic in my plans please :D 

All this said, I’m keeping at it, looking for seller/creative financing, and will keep going whether you tell me to stop, give up, or not. Not looking for ya’ll to provide my financial freedom. Thanks so much for all your advice and help community!

[Nathan Gesner]

There are about 72 questions in there and it's making my brain hurt, so I'll limit my advice.

Your cash flow comes out to about $93 per month, per unit. That's rough. It's common for a tenant to stop paying rent and leave a damaged apartment. It could take three months to get the property back, renovate, and find a new renter. That's three months of lost rent, utilities, and maybe $4000 to replace flooring, patch/paint walls, and clean. An example like that could eat up 66% of your annual profit. I guess it depends on how you're setting aside reserves, but your margins feel thin.

You have this student loan debt hanging over your head. My opinion isn't popular, but I think your focus should be on paying that off. Many will tell you that it's better to pay 5% interest on the loan while making 10% return on your investment so that you're 5% ahead. That's a fool's errand. Financial discipline gets you ahead in life, not shortcuts. 

I don't know how much a home-based plant nursery earns, but I'm going to guess it's more of a hobby. Staying home with kids is noble and I wish more people did it. Once they are school age, you should be using those hours to hustle and build some income. You could drive for uber, deliver food with doordash, get a dog-walking business, wholesale properties, get a job as a home-based caller or IT tech, and so many more things to increase earnings.

To summarize, I recommend you focus on increasing earnings, paying off the debt, and then investing from a position of financial strength.