Poke holes in my plan...

[Taft Love]

Hi all,

Happy New Years!

I have a plan for financing properties and want to run it by all of you. Since I'm still learning my way around funding deals, I'd love to hear if I've missed anything. Are there any details that would make this impossible?

While I welcome opinions on whether or not I'm going about this the "right" way, what I'm hoping to learn is whether it's possible and if there are any rules of which I'm not aware that might sneak up on me and ruin my ability to fund deals.

- I'm buying SFR that will cost around $100k all-in. Planning to BRRRR, taking my cash back out. However, my market is tight and I'm willing to leave $5k in each deal.

- I've saved up around $60k in cash. This is enough to start a couple of deals, but I'll run out of cash pretty quickly.

- In order to make sure that doesn't happen, I've worked out a deal to get access to a low-interested $100k (~7%) line of credit from a former business partner who wants to put his money to work.

- My plan is to start by using my own cash to get into deals. I'll put 20% down on each deal, leveraging hard money. A deal "pencils" if I can spend less than 80% of ARV while factoring in hard money rates.

- Every bank I've talked to has 6-month seasoning requirements for cash-out refinances—even for in-house loans. This means I can do 3 at a time using my own money. By the time the first 3 are done, I should be able to save up an amount equal to what I left in each deal. So I should be able to do 3 at a time forever. That means ~6 per year.

- If I decide to do more than 3 at a time, I'll need more cash. If that happens, I'll tap into the LOC. I'm planning to use the LOC for down payments and pay interest out of pocket.

So, what have I not thought of? Please let me know why this won't work.

[Andrew Johnson]

@Taft Love I think you're getting some good advice and you're doing well at the "spreadsheet stage". The challenge is that everything looks good on a spreadsheet :-) But if you do a few of these rehabs you will run into one that takes longer, costs more, doesn't rent for as much as you think it will, etc. Not to mention that you'll have the occasional tenant that crushes a unit and you'll spend $2K-$5K having to bring it back. The reason I'm bringing that up is that it doesn't look like you've put down (you've probably thought about it) how you're going to 1.) have reserves at the beginning and 2.) keep adding to that reserves pile as your treasure trove of properties grows. Maybe your friend can bump the LOC so can have that covered or you have a ton o' equity in your primary residence.

I would imagine BP does have a heavy element of "survivorship bias" when it comes to people posting about successful projects, buying right, pulling all of their money out post-rehab, etc.  The people that hit bumps along the road and didn't have the cash to see them through it, well, they never come back to BP and post again.  They're just out of the game.  So if I were in your shoes I'd do one.  Just one.  Test your theory.  See how your rehab estimates do, if you can pull money out after 6 months and leave 5% in the deal, if they rent for what you think they will, etc.  You hear a lot more of "I should have gone faster soon" because the "I should have gone slower" investors are sunk :-)

So if you have Deal #1 that should be $60K of your money and $70K as a LOC from your former business partner. If your buying an SFR that's "$100K all-in" you should have enough capital. You can skip a HML and the points/fees associated with it. And 7% really isn't that bad when you look at normal loans around 5%. After your season for 6 months you can pull out your projected 95% of ARV and go from there.