Investment Strategy-5 Year Plan

[Jaren Woeppel]

My wife and I have been saving up and educating ourself on real estate investing. Our goal is to have 7k in positive cash flow in 5 years. We both currently work full time, and we would like for her to not have to work anymore at the end of those 5 years.

The strategy we are looking to use is a mixture of 'flipping' and buy-and-hold. We will target properties to purchase listed in the 30k-60k range, with rehabs in the 10k-40k range, with ARV's in the 100k-150k range. We plan to buy one property at a time with cash, rehab with cash, then move a tenant in ASAP. Once we have that done, we would refinance the house, taking out how much cash we spent, and leaving the rest in as equity. Then repeat.

Do you guys/gals think this is a realistic strategy and we will be able to get to where we want to be in 5 years? Does anyone else use this strategy? What are the positives and negatives to investing like this?

[Mike H.]

5 year plan for 7k is going to be tough.  It depends on how much money you have to put into the deals. And what the typical deal cash flows there.

Right now, I'm running on average about $450/mo gross profit. Take out vacancy and repairs/cap ex and its probably about $250/mo in net profit per house.

That would mean 30 houses in 5 years to hit your 7k number.  Is it doable? Yes. Is it going to be easy. Nothing that good ever is.  But it can be doable.

The obstacles I think you're going to have to overcome:
1) Your model relies on being able to do cash out refi's on your buy and hold deals. That is not as easy it sounds. Banks are very leery of doing a bunch of cash out refi's. 

2) The question there too is how much money would they even let you pull out and where are you getting your deals at in terms of ARV/LTV? Most banks would have to be portfolio lenders to let you do your cash out with no seasoning. And most of those only go to 70% LTV. Are you sure you can get deals at 70% LTV so that you can pull your money out? If not, can you leave 5% to 10% of your cash into your deals?

3) Another issue is time.  In order to get to 30 homes, you're looking at 6 houses a year. That means you will have to be able to carry two and sometimes 3 deals at once. Do you or will you have the capital to do that?  

I say that because when you buy the house, the rehab might take 1 or 2 months. Then you can start the refi and that may take another 2 months.  And the chance of you being to find another deal and close right after the refi goes thru are slim to none.

Deals tend to come in bunches and then you have gaps where there is nothing. So if you figure you're going to have to front 15k to 30k for the purchase and 10k to 20k for the rehab on each deal, that would be 25k to 50k out of pocket. And you can probably figure on only doing 2 deals a year with that money.

So in order to do 6 deals a year, you'd need 75k to 150k.

And thats not even counting the flips you mentioned.  Thats just the money you'd need in order to do 6 buy and hold deals a year.

Do I have other suggestions? Yes. Use hard money!  I've been investing in buy and hold for about 8 or 9 years and have been using hard money. I am now at 43 houses (with #44 under contract today). And there's no way I could have scaled this big this fast without it. 

These are typically deals where i'm all in at 90k to 110k or so and they appraise out around 70% ARV. I didn't have much capital to start though so if you do have that kind of capital, then hard money may not be the best route for you like it was for me. But its definitely one way to spread your capital out enough to grow at that 6 houses a year pace.

I still say hard money is a better way to go even if you have the capital though.

You're going to hit some snags along the way and you're going to have some bad things happen that make you wonder if its even worth it. Bottom line is that it is. Investing in real estate is one of the last remaining blue collar ways for us little guys to build some actual generational-type wealth.

Heck, even if you change your mind and stop after 5 houses. In 20 or 25 years, you'll have 5 houses completely paid off that will likely be making you 1k to 1,500 a month apiece and will be worth about 200k apiece.  Show me anything else out there that could come close to those numbers.  

Again, it will require some work. But thats why I say investing is a blue collar way to build some real wealth. If you can put in the work, you will generate some incredible wealth.