Funding Your First Deal

[Tyler Kesling]

I have a goal of purchasing my first property July 2025. I'd love for that to be at least 20+ units and I'm curious how some of you financed your first deals? Lessons learned? My current goal is to create enough cash flow over the next 3-5 years that I can quit my W2. 

Some options I'm running in the background of my brain while still learning the basics would be, in no particular order.

A- HELOC.

B- Sell my current house and either rent short term to get some momentum or use part of my equity to put down on a new home and the rest into a rental. 

C- Raise the funds from friends and family.

D- Just use cash from savings and start small.

E- Pull from 401K and really take a risk on my returns. (Cash Flow is my goal) 

Pros/cons, other creative ideas?

[Randall Alan]

Quote from @Tyler Kesling:

Thanks for the insight @Randall Alan on how current owners and markets might react to the ease on rates. I also appreciate you sharing your story. I've really enjoyed just reading through the forums and listening to books about individuals paths and successful and the challenging deals.

I've got big goals so I'm going to do everything I can to get to 60 doors before the end of 2026 and the deals I'm going to get into are going to net me a minimum of $100 cash flow per unit. With the direction things look to be headed, I don't think that's unreasonable. If I have to use every dollar I have access to and drain my life savings dry, so be it. I'm burning the boats on this one and making it an obsession. I've built my mindset to believe that my W2 is a prison that I have to escape. It's a great motivator. Plus 20 doors will help pay for a PM. I have zero interest in becoming a LL. I'm not opposed to buying a four to start if I can find a PM in the area that will service that and then turn that into a 20+ 12 months down the road. 

I would think with the HELOC, I could run with that until I can do a refi and with the interest rates starting to come down, there should be some gains to be made and I can repay the HELOC in short term.

I know the 401 penalties are steep but my thoughts are if I can gain enough cash flow to leave my current career, do I really need to worry about whatever money is in there to draw from 20 years down the road? I feel like by the time I can withdraw without penalties, I should have enough cash flow and appreciation that my "retirement" years should be taken care of.

I'll have to see what happens when it comes to lenders, I guess. My plan is to be as knowledgeable I possible can so the deals I present are rock solid and convincing enough to get my money. I think I know enough people with funds to jump in if the first deals get bigger than my pockets. 

Thanks again,

 @Tyler Kesling

I love your enthusiasm, but you need to be careful about being so enthusiastic that you ignore the basics.  There is something to be said about knowing what NOT to buy.  $100/door is a no-go - probably in most people’s books.  Why?  Because you realistically won’t be covering the expenses of the property where it justifies the risk or investment.   Realistically your money is probably better in the bank if you are only making $100/door on a property.   Put another way - you want a better deal than that.  For context - after 7 years we are averaging over $700/door… but this is after many financial moves to get us there… but even starting out, the  $300/door was, and remains a good goal post to judge a deal by. 

As a beginner you are green enough that you need to temper your enthusiasm to make sure you don’t bite at bad deals.  This is also a good reason to start smaller… you get some experience under your belt with less risk of making a big mistake. 

There are A LOT of nuances to being successful in real estate investing, and some are only learned after the fact.  

A few to be aware of as examples…

Capital gains… you probably know they are either 15 or 20% (and in rare instances zero if you have no income)… but have you heard of NIIT (Net Investment Income Tax)… this is an extra 3.8% tax you get hit with when your gains are over $250,000 in a year.  We sold 2 properties in one year and that popped up… cost us $15,000 we didn’t budget for.  

How about realizing that when you use the current property taxes of a property you are buying to calculate your per door profit that the following year your taxes will reset to what YOU paid for the property and will likely significantly increase your tax expense - which can take you from a positive cash flow to a negative cash flow on a low cash flow property… now you are paying your tenants to live in the property every month out of your W2 income  hoping for an appreciation play until rents hopefully increase.

I could go on and on.  The point is, it’s great to be enthusiastic, but you don’t know what you don’t know… until you find out some day.  So there is something said to go at a measured pace as a beginner… even if only your first couple of deals.   Did we do that… no… bought 12 properties in 2018, 10 in 2019, and 9 in 2020.  But we had significant resources behind us, and  we were buying 1-2 unit properties that were cash flowing with great numbers - so we were taking a measured risk.  It’s a lot harder today with properties at 2-3x the price and interest rates much higher too.

I truly wish for all your success!  I’m just advising caution as a beginner.  I drive a Tesla… it’s a really fun car… but has so much acceleration you can get yourself in a dangerous situation if you don’t respect its capabilities… especially as a new driver.   I was talking to a lawyer friend of mine who was involved in a lawsuit where a guy was letting his friend try out his Tesla in “launch mode” in a residential neighborhood.  The short version of the story is they ‘launched’ the Tesla right over a curb and into the side of a house killing someone’s inside.  As an analogy to real estate… by starting of with a couple of smaller deals you will be on a much better footing to know more of the ins and outs of doing real estate deals so you aren’t a novice when you get to the 20 unit deal where if you miss something you don’t end up like the Tesla driver with lots of enthusiasm but not a lot of practical experience and you get burned.

All the best!

Randy