What should I really be doing?

Question

With the purchase of my current rental, once it is leased out, I will be FI.  Here is what I currently have:

My house paid with cash.  Approx value: $210k.

Rental Property 1: $35k mortgage, Approx value: $120k.

Rental Property 2: Paid cash, Approx value: $135k.

I have about $20k in cash, with $40k available to me starting in May 17(can't get it until then).

Rental Properties in my area are in the neighborhood $100k-$120k ARV.

I bought rental 2 in cash at $79k + $10k repairs.

Assuming similar deals in the future, if I were to HELOC my main property(for best rate) for $120k and put the $60k I have available by next May, I can approximately purchase 2 more properties(70% rule) by next summer and have 4 rentals.

But then what?  I want to quit my job and start managing rentals and acquiring properties full time instead of sitting behind a desk solving computer problems for others(Maybe i'll work 3 months of the year in the sunny side of the country during winter time to add to my seed money).  I'll be stuck until my 4 rentals provide me with another $80k and with living expenses, my estimate would be a 5th property could be purchased in cash in about 3 years.  This seems inefficient to me.  So, what should I do?  HELOC on my main seems risky anyway, so i'm leaning toward not doing that.  Should I pull money out of my paid off rental instead?  Should I instead, use the $60k I have going for me to do some flips until I get enough cash to buy a rental outright?  Should I be doing 80% funding from here on out?

My long term goal would be to have about 6 SFH rentals and then maybe branch out into some 4-plex or higher.  I'd like to see $10k-$20k/month in gross rental receipts.  What is my best plan for funding my goals?

Thanks,

Brian

Brian Pleshek · Answer

@Jeff Fruhwirth Yes, I have money set aside for repairs.  I could sell my personal residence and move cheaper, but doesn't HELOC do the same thing with just a bit extra risk?  They'll give me 80% LTV and my credit score is 700(just checked).

I hate my job, but moving to another one will make me perhaps too high a risk to acquire new financing, so getting something in place before I pull the trigger is important.

I am nearly FI with just my wife's disability check and my one rental.  My monthly expenses are about 3500/month, but quitting my job decreases my expenses by a bit over $500.  My income without my NEW rental is approximately $2800/month.  If I worked over my cell phone plan and killed my cable bill, my expenses would drop another $300(yes I'm overpaying on both).  I have no car payments or credit card payments so that's good.  When this new rental comes on line, hopefully 11/1, my income without my job increase to $4100.  So that's approximately a $1000/month "profit" over my expenses.  That's plenty to cover expenses on the two properties, but not enough to move forward on a 3rd rental.  Hence, I wanted to have another 1-2 in place and then that way, i'd have an extra $40k/year of pretax income that should get me a new property every 2 or so years.  Slowly, i'd get to 10k/month over the next decade.  Of course, keeping my job would have me keep an additional $4400/month after taxes to add to that.

But I'm really not happy, so I'm needing some help to get my next 2 properties planned for and after that, I'm happy with slowly building the rest.  I don't plan to entirely quit anyway.   I will probably work for 3-4 months of the year some place warm to increase my cash stack.  But that isn't enough to allow me to get financing so the plan has to be made now.  That's what I needed help with.  The best strategy to use my resources to acquire another $180k(90x2).

Thanks,

Brian

Brian Pleshek · Answer

@Sam LLoyd My goal is to get $10k/month in gross rental income.  I'm trying to figure out the financing issues on how to get there.  Do I cash out refi the rentals?  If so, what rate can I get?  What percentage of appraised value will I get?  Would I do better just financing the new properties?  Cash seems king when buying.  From a safety standpoint having 1 paid off rental at all times seems a good idea.  So, does cash out, buy new with cash seem the best option?  What about tapping a HELOC on my main property?  Rates are low for that, but risk increases as now my living space is at risk.  BTW, I've listened to all the Mad FIentist podcasts before I came here.  They actually referred me here.

Brian

Jeff F. · Answer

Hi @Brian Pleshek

Are you including set-asides for repairs? Would you be opposed to living in an extremely low cost-of-living area for a while while you firm up your situation and decide how you want to invest? Is there anything else you could do while waiting?

What exactly are your goals, and what are your monthly expenses? How much do you need? How much is your freedom worth?

Sam LLoyd · Answer

Sounds like you need to nail down your goals.  My goal is to do real estate full time while having my vacations paid for and $1000/month to play with... The hardest part of my goal is to be content at that point.

So, starting with your goals.... is it to have 6 SFR's paid off or to do plexes... or to get that gross rental income.... or do all three?  I think that if your goal is to branch into plexes, you're going to have to start using leverage.  Pull money our of each SFR and use it as a down-payment for a 4plex.  If you buy right, your cash-flow should start to climb.  If your goal is to have 6 SFRs, I think your plan of pulling money out of your residence to get 2 more is a good idea, then keep working till you get the next 2... then you can probably quit and still pay off your residence and mortgages while being content with your situation.

There's a podcast/blog thing that might suit your fancy called the mad fientist.  It's not as ambitious as most biggerpockets dreams, but there is some fun information on there.