Start investing with multiple units or just one...Plan A or B?

[Marshall Baker]

Hi – This is my first post to BiggerPockets so I’ll introduce myself before I ask my question. My name is Marshall Baker and I live in Western Montana. I work as a sales manager for a major telecommunication company which supplies me with a steady income. I also own an unrelated business which is profitable. I currently have one rental property on the East coast which I had no desire to get into but life through me a curveball many years ago and I still have it. I have experienced the issues landlords go through like unforseen evictions and capital expenditures. I have been browsing the BP forums, podcasts, and various other tools the site has to offer. I have read several of the recommended 21 books by BP, some twice. I totally appreciate the volume of information this site has to offer, and I am sure I will glean a ton of information going forward browsing through it.

The business I own is profitable and will generate $70K in profit this year. I started the business from scratch 3 years ago and it has increasing profits YOY. The business has very low overhead, has no employees to pay, and has zero debt. It is an entirely online business that has garnered a great reputation and a lot of my business comes from referrals and word of mouth. It is a product-based business and I carry between $5K and $8K in inventory at any given time.

Recently I have been thinking of selling the business and using the proceeds to dedicate to rental property investing. I have no idea how to value "this" business, but it is very profitable (and getting more profitable YOY) and requires only about 15 hours per week to run. My guess is that it is worth $450K and I am basing that on the cash-on-cash ROI in Brandon Turner's book. In other words, $70K cash flow divided 15% (presumably a good ROI) equals a bit over $450K.

The above information brings me to my question…Do I use the $50K I have in cash to buy a duplex (I’m looking at a $200K duplex now) and use the $6K monthly income from my business to build my real estate holdings over time or do I sell the business and start my rental portfolio with potentially $500K?

Plan A is to use the $50K I have in cash for my first rental purchase focusing on multi-unit properties like a duplex and use the profits from my business to purchase more properties when opportunities come along. This would also afford me the security of having around $6K cash flow monthly coming in from my business should I have some unforeseen “bumps in the road” with my rookie real estate investing but also afford me true potential to grow my real estate portfolio.

Plan B is to sell my business and use the cash to purchase several multi-unit properties or even an apartment. The positives would be that it would greatly increase my scope and ability to purchase properties. The negative would be that it would choke off the cash flow I am receiving monthly from my business and any “security” I get from that. I do realize that I would be up against the clock with the 1031 IRS rule if I sold so I would have to have some properties lined up before I did this.

Lastly, I do have someone who seems to be willing to give me advise (mentor) with my deals. He is a seasoned real estate investor who I met in my professional career. However, I have not asked him this question yet.

Plan A or Plan B?...or is there a Plan C I haven’t thought about?

Best,

Marshall