Cash flowing $2600, & in debt for my first deal in CA, now what?

Question

Hey BP!

I am done renovating my Bakersfield 4plex, 3 units completely gutted and remodeled and 1 decent unit had two turnovers over the last year to get the rent up to market. I went in way deeper then I thought down to the studs in some rooms, had countless adventures, so much fun and so many stories, learned a bunch, and spent a bunch, including a brand new roof I was hoping to hold off on for a year or two.

In total I spent $70k for all the renovations including the roof. I did 70% of the labor myself over 7 months. Now I am positive cashflowing $2600/mo which will be bumped up to $2900/mo in 18 months once a personal loan is paid off that I had to take out when I started pinching pennies to finish the last unit.

I never was planning on cashing out refi, but I wasn't planning on spending $70k in renovations either. I got in at a 3.375% rate and a cash out rate would bump me up to 7% right now. Everyone is saying to not cash out refi which I understand. But I also have never been so broke and looking at another 2-3 years before I can buy my next one, and a instant $100k in exchange for cutting my cash flow by more then half doesn't sound too bad to me. For now, I am going to hold off on refinancing and look at other ways to get my next one quicker.

During this journey, I have had many people come up to me. They have a lot of money they want to invest in and I am now teaching myself how to structure a private money proposal and use hard money. I want to practice a BRRRR next or something where you don't have to start from ground zero once you finish. I know it will be a lot harder to find the property, but I am up for the challenge. If you have tips on how to propose or structure a private money proposal I am all ears! On to the next one!

Thanks as always BP community, I am glad to have you in my corner!

Peter Eberhardt · Answer

The plan would be to purchase another property. My only "goal" that I really had in mind was I wanted to acquire a property every year that would cashflow at least $1,000 once it was stabilized. With the amount of money I put into this one, I cannot buy another property this year but I also have the cash flow for 2.5 years worth of properties in reference to my "goal".
And with what you mentioned, that is what I was going for and it would be one in the same? I have this idea of using 100% private money to acquire and stabilize properties. They are the money and I am the sweat and hustle. Obviously the cash flow wouldn't be as great but if it is a win win for the both of us if I can grow their money, I would hope that they would want to partner over and over again.

Janice Poncetta · Answer

Nice work! Where is the property at in Bakersfield? Have you considered trying it as a short term rental?  I'm in Bakersfield and have a few rentals in the downtown area. I converted those into STRs which are mostly booked by people traveling for work during the weekend and people visiting family on the weekends.  It will be an added investment to furnish but could bring in additional cash flow for you.

Theresa Harris · Answer

If your payment increase $1500 a month (based on what you wrote), plus the actual cost to refinance...I'm not sure how far ahead you'd be.  Did you borrow the money for renos or was that money you already had?

Having goals like buying a place a year is good, but sometimes reality throws you a curve ball.  With this place, you have 3 units and just did major renos (which look great).  I'd think about holding off a year.

Alex Breshears · Answer

Hi Peter!

As a private lender, there are a few things we have done in the past.  I cannot speak for all private lenders, but just my experience and the knowledge of other private lenders like me lending out their own capital.

First, if you have a ton of equity in a property that is strictly non-owner occupied, you may be able to do whats called cross collateralize this property with another acquisition, using both properties as collateral for one loan.  A private lender may feel that this is sufficient enough of a risk buffer to not require a downpayment if you are also buying a property with equity in it as well.

Second, you could get just a second lien on the investment property and use that capital to purchase the next one. Down side of this, the loan is likely going to be short term, like 12 months. If you are able to work out refinances or even do a flip to pay off that second lien, it allows you capital now to get another property and pay it back when it is complete.  Also - having a lien (or two) on the property when you go to do the refinance will be a rate and term refinance versus a cash out refinance - which generally have easier underwriting and lower rates than cash out. They also generally go up to higher LTV's as well, basically 70% versus 75% for a cash out refi!

I hope this helps!

Peter Eberhardt · Answer

Thanks @Amber Smith and thanks for all your help and recommendations as well!

Amber Smith · Answer

They look great, Peter! You guys did a great job!

Zachary Beach · Answer

@Peter Eberhardt what’s the loan amount? If the loan was on 400K the 3% increase is on all the money so to get the new loan your paying around 17% for the money locked in to the property. That’s the way I would think about it? Also see if you can borrow from someone else for less than that amount.

I have had a few similar situations and I have made all the different choices at one time or another. I have done higher rate refis to get a higher LTV so I could pull out more money even though the real rate for the extra money was like 20%. honestly I don’t recommend that. I have also not done refi’s letting large amounts of equity sit. I don’t recommend that if growing fast is your goal. I have also found private money lenders to put seconds depending on the lender and the interest rate this is in my opinion the best option. Make sure you have a plan to repay and try to get longer loan terms or at least an extension option, that’s the tricky part about this option.

If you can get a private lender at say 6-12% and you have another deal lined up before you take the money (costly mistake I have made)  than that’s probably what I would recommend. If you can try to get 5 plus years. One year deals are very stressful at least they have been for me because it feels like if the market dropped and I couldn’t sell or refi I would be stuck with it but on five years I could figure something out or just pay it off with the cashflow. Short term debt is much more dangerous than long term and should be treated with caution. If you can after you do the deal and get the next property maybe use all the cashflow to pay off the loan faster then once the seconds paid off borrow again that way you get the compounding interest effect on the money you are saving.

Amber Smith · Answer

You’re welcome, anytime!

John McKee · Answer

If you have the chance to deploy 100K into another property that cash flows I would say do it!  You will thank yourself in 20-30 years.

David A. · Answer

I was in a similar situation with about 200k locked up in a new build ADU and the renovations on another home I purchased around the same time but didn’t want to give up my low rate. When that cash out refi wire hit my account it was like a weight lifted off my shoulders. I was fine taking the cash flow hit to be ready again to deploy those funds on the next one but more so for the piece of mind to be out of my temporary variable rate financing.

Cash flowing $2600, & in debt for my first deal in CA, now what?

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