LOOKING FOR INPUT ON NEXT STEPS TO SCALE - Mid Level Investor

[Parker Ernsthausen]

I am a managing member of family rental LLC which owns 4 properties in the northwest ohio area. We currently operate the portfolio at an 8.5% cap and have moderate cash flow. The current market that we are in has limited inventory and are looking to expand our portfolio to maximize wealth. We recently handed management over to a management company and I'm curious on what we should be thinking about for next steps that are practical for a moderate risk level.

Should we keep investing in our current market where most of the partnership lives?

How do I get the rest of the group comfortable with investing in another market where we would need to source property managers, learn the area, etc?

What other things should we be thinking about?

Thanks,

Parker

[Joe Villeneuve]

The greatest obstacle in the way of the desire to expand portfolios is the need for cash to use as down payments.  Portfolio expansion is really defined as an increase in cash flow.  In order to do this, there is a need for more properties, or exchanging existing properties for larger ones, with larger cash flows in each.  Either way, there is a need for cash for the DP's for these properties.

Using the existing CF as a means to accumulate this needed cash is a slow, S  L  O  W  process.  Using income from jobs, isn't any faster, and can actually take longer.  While this is happening, the existing properties are accumulating equity from appreciation (hopefully).  It's in this equity increase, which usually happens at a much faster pace, where you will find your source for the needed cash for DP's...and expansion.

BRRRR doesn't work fast, and actually works in reverse. The best way to use this equity, is by selling the properties. This means initially, the use of cash flow properties should be the way to accumulate a build up of cash for expansion. It's a mathematical certainty.

The key is the timing.  Two events must happen for this to work:
1 - The accumulated CF must equal the DP,...which means the property is now basically free since the recovery of the DP returns all of the cost to the REI. This of course requires the property to be cash flow positive.
2 - The  equity accumulated from appreciation (only) must equal the equity you payed for,...the DP.  This means you've doubled your initial equity.

Once these two events occur, the sale of the property should double what you had before the sale. Also, this is when the property is at it's most value. From this point forward, no matter what the future appreciation brings, it will reduce the value to the REI. This is based on the true value of what the cash/cost in the property (DP, Cash Flow and equity) is buying in property value.

This is an example of the compounding effect Albert Einstein referred to as "the greatest invention of the 20th century".  He also said that those that understand this, would be living off of those that don't.