what would you do if...

Question

Hi team. Im In San Diego, self employed for the past 15 years, have about 30k cash, have about 150k in equity in my residence and Im looking to prepare for my familys future... My greatest challenge right now, is my business is a cash business and my DTI has been maxed out for the last few years so I can't qualify (yet) for even a simple refi, even though realistically, I can afford it.

Ive been reading ALOT here on the forums and surprisingly found many of you that are or have been through the same scenario. Im interested in knowing what you would do this time around, in the current market given the same situation.. I have a few ideas but as I get older, I realize how much I don't know, so Im asking for some suggestions. My current business really slows down in the winter, so Ive been finding myself spending savings in Nov, Dec to make up for it and Im over it.. 2 steps forward 1 step back every year and its time to up my game, get uncomfortable and handle my BIZ..

Any words of wisdom or things you'd do differently this time around?

My goal is to flip some properties to get some $$ saved so I can eventually get a few rentals under my belt and have (semi) reliable income yearly. I'm a big fan of hard work and motivated as well

Thank you! Im looking forward to hearing some replies.

Aaron K. · Answer

@Rich Metteer that's good to hear, I just didn't want you to be like this guy https://www.biggerpockets.com/forums/12/topics/776300-trying-to-acquire-a-loan-as-a-bartenderAs far as what to do I would probably go the rental route, flipping margins can be slim in SoCal even more so when hard money is involved and you don't have established contractor contacts.

Rich M. · Answer

@Wesley I. At this point, Im learning the options and collecting strategies so thank you for another tidbit of advice!

@Justin R. This advice makes total sense to me and is exactly where Im at right now.. On your check list, Im at number 1 and building my knowledge. I imagine that while building my knowledge of the options, I can build relationships, which leads to experience. The one thing I bring to the table is Im a fan of consistency and hard work. I plan on implementing each of these things in order, but will (for now) put that profit at the end of the list.

Im a big fan of the notion that if you invest time and effort in what you do, have the RIGHT relationships, make the right decisions and execute them with knowledge, then the profit will come. Thank you for taking the time to post!

Justin R. · Answer

@Rich Metteer If your goal is to "plan for your family's future" you really need something where there's a path that makes a meaningful difference to your future trajectory.  Buying an OOS rental, getting an extra $200/m, and waiting for 10 years to buy another isn't gonna get you there.  Buying a note and getting an 8% return is better, but still not gonna move the needle.  Getting to meaningful difference involves many cycles of increasing effort/risk/project size/whatever ... you need to speed up the cycles so you get through more of them quicker.  OR, you need to build an advantage that others don't have so you can skip cycles entirely.

If it were me, I'd focus on finding a property that can be flipped/rehab-and-rented/subdivided/whatever that you can get under contract locally.  If it's a good deal, that gives you an asset in the form of an opportunity that's valuable to experienced people (like me).  Leverage the asset you now have.  Take that to someone who knows what they're doing and has the capital to do it, and use your $30k to co-invest in 3rd position.  Let the experienced person take 2nd position.  Be the project manager and extract as much knowledge as you can from that person.  Try to get your $30k to turn into $50k.

Knowledge? Check.  Relationships? Check.  Experience? Check.  Profit? Check.  Repeatable in shorter cycles? Check.  Requires real work? Check.  :-)

Point being if you have a long term perspective, I think you need to focus on building the best foundation as quickly as possible.  Trade time for experience.  Demonstrate commitment through time or financial participation.  The meaningful returns will come in time.

Wesley I. · Answer

@Rich Metteer

I started with 30k this year and bought a non performing note. I’m not advising you to do this since it requires a lot of research and resources but it’s possible to JV with someone who has skin in the game while you learn it. You can also buy a performer with a yield of 8-10%.

Or what Dan said, multi family syndication. Some syndication will let you in for $25k.

Dan H. · Answer

I think joining an established syndication would be less risk, less work, and likely produce a better ROI than investing OOS in a zero appreciation market.  Building and maintaining an OOS team takes work.  The return projections from OOS low unit count rentals seldom reflect reality.

Good luck

Rich M. · Answer

All really great info!

@Aaron K. I definitely meant a fluctuating income. Being shady in any aspect of my life simply doesn't happen. Ever. I hope it didn't come off like that? . Thank you for suggestion!

@Emily Di Im thinking OOS flips or rentals because Id really rather not take out $ on my home unless absolutely necessary.. Ill check out what you suggest, so I understand my options.. This is all new to me so any knowledge is good. Thank you!!

@Dan Heuschele  Im looking to supplement my yearly income and add value to my family's future and After all the research Im doing I think that OOS rentals may be where Id like to start. Thank you!!

like I said, I'm new. I don't know much at the moment. Im just explaining my situation, not necessarily looking for the road map, but more for options and to better get to know the community, the lingo, the options so i can at least pretend to know what Im talking about when opportunities arise. Thank you guys for options- I appreciate the feedback!

Dan H. · Answer

You were not clear if you wanted something to keep you busy during the slow months such as a flip or something more passive.  To get in on a flip you likely would need to get HELOC on your residence and use the $30K.  Most flippers do not do that well on their first flip but if you can learn something then you can leverage that knowledge next year to have a more successful flip.

If you are looking for something passive in RE, consider researching syndicators and joining a syndication.  It is not risk free, but the return typically justifies the risk (assuming you do your research and are not investing with a syndicator with little experience).

Then keep researching RE so that you can choose your next RE investment (buy n hold, flip, syndication, NNN, private money, etc.).

Good luck

Emily Di · Answer

There are lending products in the market you might be able to leverage. On your primary residence you could refinance into a non-Qm loan for self-employed borrowers. You can probably refinance for 70-80% LTV and the rate will most likely be higher than what you currently have. That may give you the cash you need to buy an investment property. It's you're primary residence, so please invest wisely and try to ensure you're getting cashflow from the investment that's covering your increased mortgage expense. I've seen too many people do this badly.

Once you have the cash, there are many lenders in the rental investor space with products that lend based on the asset and the rents versus your personal DTI ad tax returns. You'll need a decent credit score. The rates will be higher and the property obviously will need to support itself. You'll probably need 25-35% down payment and enough money left over to show you can cover payments for 6 months. With those sums, that may help narrow down where to look for investments/ what price point for investments you want to aim for refinance for and save for. Good luck!

Aaron K. · Answer

@Rich Metteer I can't believe I have had to say this twice in a week on this site but don't commit tax fraud.

"My greatest challenge right now, is my business is a cash business and my DTI has been maxed out..."

Assuming that by a cash business you just mean that your income fluctuates and that you are not hiding money from the IRS, I'd probably go for an OOS rental, flipping is hard especially in SoCal and if you don't know what you're doing you can make costly mistakes, also $30k may not be enough to flip here given what most HMLs want as far as LTV.

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