Best use of initial capital, focus on one or spread it out??

Question

Newbie here.  I am in process of pulling a HELOC on my primary residence to create capital for real estate deals.  At this point I'm thinking between my HELOC and cash reserves I should have between $30-40K to work with.  I know that each deal would need to be analyzed individually, but my question is, should I focus this capital on one property (pay cash for something and go solo), or should I spread this out, partner up and get a number of properties going?  I have two guys I have a friendship with, one is a General Contractor, the other is a Property Manager, and both are interested in partnering.  Just curious to hear people's thoughts on the difference between focusing capital on a single, good deal and flying solo vs spreading it out and partnering.

Thomas S. · Answer

It will depend on your target market but the reality is that the only income property that will produce true positive cash flow is one that is 100% leveraged. When you have equity in a property what you are doing is buying false cash flow at a very high premium due to the opportunity value of cash as a investment vehicle.

You must put only the bare minimum of cash into a deal and pull out any equity available in the future to insure the maximum amount of true cash flow. If you do not wish to invest in additional properties when you pull cash flow park it in a mutual fund or some other investment rather than leaving it sitting dead in a rental property.

Consider that the opportunity value of cash for investors is worth a minimum return of 10% (easily achievable in a mutual fund). This means that for every 100K of equity in a rental property it is buying or conversely eating 10K worth of your profits annually. IN the vast majority of cases this means the property itself generates zero or negative cash flow once the equity return is deducted.

Extremely conservative investors that suffer from investment stress pay off rentals to sleep better at night but they make no true cash flow from their properties. The only monies generated is from their dead equity which turns the property itself into a  liability. They would make greater returns, with far less effort, by selling all their properties and parking the cash in a mutual fund.

Thomas S. · Answer

IT primarily depends on your investment field. Flip or hold.

All cash is good for flipping but cash in a buy and hold only buys false cash flow in a rental. Equity in a buy and hold will eliminate any true positive cash flow that a property could potentially generate.

Buy and hold requires spreading equity as thin as possible.

Bob Okenwa · Answer

If you pay cash for something, you have an opportunity to BRRRR (assuming you are into buy and holds) the property and that is something I'd look into. Leverage is the name of the game and more properties tends to mean more money. And more headaches as well lol. But I am assuming you'd want a scalable business so if you can handle it, getting a few properties at once may be more beneficial than having just one.

Lucas Cole · Answer

@Thomas S. very helpful.  Thanks!  @Andrew Johnson agreed.  In this case, the partners have complimentary skill sets that would help us scale much faster than if I went solo.  Helpful insight! @Mateusz Prawdzik thanks! @Derek E. thanks!

Mateusz Prawdzik · Answer

@Lucas Cole @Bob Okenwa @Derek E.What i did just like most people was start flipping to get the construction aspect of the business and then move onto flipping. With that being said , I live in one of the most appreciating markets there are in North NJ. I mean just this past 3 months, a house that I was suppose to sell for 210k jumped to 250k... so you see where flipping benefits me.

Now in your case, you need to go by market and what you want to do. Slow and long term income or all at once chunks so you can reinvest. Also, passive or active investing? These are all the questions and more that you have to ask your self because only you will know the answer to them, not anyone else.

Derrick E. · Answer

Correct.

I agree with this method if the original poster was planning to put down $30,000 on a $100,000 home.

It's hard to find financing for under $30,000, not impossible but a headache.

Also, if someone doesn't pay rent, you now have to pay the mortgage yourself.

I prefer to remove a lot of that headache and pay cash for everything, but all I purchase are homes under $30,000.

Ronny Tiburcio · Answer

Newbie here. So you guys are talking about putting down the minimum to give you the opportunity to buy more properties with the capital you have?

Derrick E. · Answer

He means putting down the minimum 20% and take out as many loans/or as much money as the bank will allow you to take out.

Derrick E. · Answer

@Lucas Cole I respectfully disagree with Ethan. In some markets it makes sense to spread yourself thin in buy and hold.

In the low income houses, which is what I do, I think you are better going all cash, which is once again what I do.

I am about 2 hrs east of you. We have so many cheap houses and deals here that it only makes sense to pay cash. Plus the homes we are buying for $30,000 or less are not going to appreciate much if at all over the next 10 years.

I'd go solo and just pay someone to do the repairs. Once again, this is how I do it. In our area you can find cheap work from posting an ad on Craigslist. Be picky about the tenants, save the rent money and look for the next deal.

It's also hard to find a bank who will finance something under 40k, so sellers are limited to all cash buyers and really opens up some deals.

My last house I just renovated I have a total of $18,000 in it and rent it out for $600/month. I did a lot of the work myself and contracted it out one job at a time with my handyman.

I just bought another house yesterday for $7,000. I will put less than 3,000 in it and will rent it for $700-$750/month.

With these types of deals why do you need to share your money with someone else? Why take on the stress of leveraging yourself? I don't have to rent to the worst ppl because it doesn't matter if it sits empty an extra month, returns are so good and I don't be have a mortgage payment. To me, going alll cash removes a ton of stress.

Once again, I am only speaking in terms of homes under $30,000 and low income buy and hold.

Best use of initial capital, focus on one or spread it out??

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