How much cash on hand before we go full-time?

Question

My husband and I recently relocated to Portland Oregon for a contract our tech company won. We moved from Cincinnati where we flipped 3 properties on the side and we made about $30k on average after expenses on each property. The buy in here in Portland is so much higher our long term goal is to return to Cincinnati and start a full time flipping and rental business. We have never been landlords but feel like it's the right move for retirement investing.

Here is my question... Our tech company is doing very well but it's just not where our passion is. We know we want to be doing real estate full time. We need $120k in personal living expenses a year in Ohio for our family. Our goal is to flip 6 homes or more a year to achieve that salary. We also want to invest in rentals by purchasing the first 5 in cash and when they are seasoned we pull the money and purchase 5 more. We are trying to figure out when do we have enough cash to make the leap and exit our tech business. We were thinking the following but wanted to get opinions of seasoned experts.

1 year salary reserves: $120k

Cash on hand to flip 2 properties at a time (goal being 6 total for year)

$115k buy in on property and 35k in renovations = $150k x 2 = 300k

Pay cash for 3 rentals to start with $70k per rental, 15k to fix up rental = 85k x 3 = 255k

(after rentals season for 6 months pull cash out to purchase 2-3 more)

Total cash needed to start full time: $675k

Based on the timeline we hoped for we will be closer to 400k and were trying to figure out if we would be okay to take the leap or wait it out until we actually meet our numbers. I'd love to hear some opinions. Thanks so much!

Steve Milford · Answer

Be aware, I know nothing of the Cincinnati market aside from what I quickly gathered from Zillow. My questions/statements are:

1) In what time frame did you flip those homes in Cincinnati?

2) If you want to pay cash for rentals initially, why reverse strategy and then leverage them? Why not just buy them leveraged in the first place? And then as you stock-pile cash, you can buy more leveraged.

3) You want $10k per month in salary reserves?

4) Can you find enough flips for the prices you want?

5) Why not find something here that you can flip or rent, and then take the appreciation with you when you are ready, or 1031 it when ready?

Appreciation is roughly 6% in Portland area and 9% in SW Wash from MLS, and projected to be approx 7% in Cinn. As soon as I build my next 15-20% down, I will be buying here again. I understand that the price point may be a deciding factor toward Cinn.

6) Where is your risk tolerance at?

Over time I have found my risk tolerance was pretty low, and no matter how much a part of me wanted it to be higher to invest, the battle inside my head kept going around and around. It took me a while to be OK with it, and that only really happened once I became a Realtor and built another income stream in addition to my W-2 position (I originally wanted to quit that W-2 position too). Then I built another income stream, and another. Now I am totally at peace with my risk tolerance, because I realized it forced me to diversify. Now I no longer ask others, "Is this the right time?" Now I ask investors I meet that are apprehensive, "Do you want to carry a note to me? Because I am ready to buy again!" (And I let the MLS do the work of finding my deals.) What does my W-2 job mean to me now? In addition to an income stream, it is health insurance for my family, and perceived "lender-stability". That's it - it is not who I am.

7) Is this analysis paralysis?

IMO, you should know the numbers like the back of your hand and know your ratios for peace of mind. Waiting for what if, when, is just paralysis. I.e. All I really care about is that my is that my rent-to-debt service ratio to be 1.4-1.65. The price is only a factor as I build the next down payment amount.

Arlen Chou · Answer

@Wendy Owens I believe it might benefit you to think of this issue in different terms. If you leave your current W2 jobs, it will become more difficult for you to "pull your money out" without established income.  It is not easy to get a loan when you don't have a W2. Assuming your flipping activity is a true business with all of proper licensing and associated accounting, you should be pulling a salary from that business to establish a new income source.  I have seen to many people just quit their jobs, because it is not their "passion", only to realize that they cannot get a loan without a W2.  Once you can get loans without the main W2 factoring into the banks decision making process, you are probably ok.

Wendy Owens · Answer

We flipped the houses in Cincinnati in 2014, 2017, and just before we moved in 2018. We took the approach of living in the home while we renovated it over 6 months to a year in our spare time. This, of course, would not be how we approach it if it were our business.

The reason we plan to pay cash for rentals is in an effort to be competitive in the market. Our goal is to acquire our rentals well under market value. There are a considerable number of investors in the Cincy area and to ensure we get the best deals cash seems to be king. We have talked to other investors in the Cincinnati market that said they are able to get properties at about 60% or less of the market value by paying cash.

As far as salary we are used to living on around 200k so the 120k would be a cut from what we are used to. We have three kids and the area we would move back to in Cincinnati has high property taxes and higher home values but it's the schools our kids grew up in so it's where we would return to. I doubt we could dip much lower than that salary so our hope was one-year reserves would create the safety net we need but we also don't want to be overly cautious.

To the question of can we find enough flips, based on what we have been finding online in our research if we include the surrounding suburbs we should find more than enough.

We have been looking at properties here in Portland and are considering doing a flip if we find the right deal. We will be here for at least one year to fulfill our contract with our client which should be plenty of time to fit a flip in.

We don't mind risk at all. We have started and sold other businesses and we crossed the country to come out here for our tech business. Our biggest issue is we don't want to leap from a business we know inside and out to one we have only dabbled in, before we know we have set ourselves up for success. That being said we also want to build into something that will create passive income for when we are older. We also really enjoyed flipping the previous houses and want a business our kids can be part of when they get older if they so choose.

My gut says we would be good on the 400k and the 675k number is just my own fears and doubts creeping in.

Wendy Owens · Answer

I think there is some confusion and I wasn't clear when I explained our situation. My husband and I do not have W2 jobs. We have been self-employed for ten years and run a business that has employees. We're hoping our client keeps our employees on after we exit and that will keep some income flowing but we need to budget for worst case scenario. Our gut says they will keep things as is, but of course one never knows.

Also, after college, I was a mortgage underwriter all the way up until my husband and I started our tech company ten years ago. It's been very helpful for us as far as understanding financing rules. I think that's probably part of why I have convinced myself we need so much cash.

We have also been discussing flying back to Cincinnati every quarter for a few weeks to acquire a rental over the next year. This way we have 4 rentals already seasoned before we ever step away from security.

How much cash on hand before we go full-time?

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