Am I stretching myself?

Question

Hi,

Newbie here. Started real investment in Jan'22. Need your advice. I have one primary residence and two rental properties in LA area. Both the rental properties are in class A neighborhood with 10/10 rating schools. They are 2019 built townhomes and currently occupied. There is no significant cashflow, but have pretty good appreciation. Our combined W2 income is 500K/annum and we have total debt of 1.7M$ (includes mortgages, HELOC on primary residence etc)

Now we would like to purchase a third property (duplex) out of state which is listed for ~850$. This one is also a new built 2022, ready to move in. Rental in this area is 3000$ per unit. So there will be decent cash flow. But the problem is we do not have money for the downpayment. One option is to go with hard money loan and take personal loan for the downpayment as most of the banks aren't giving HELOCs on investment properties. This route will be expensive due to higher interest rates. Second option, to find partners for deals going forward, but none of my friends/family are interested in real estate investment.

Any suggestions or feedback on how do I scale effectively? Am I stretching too much here? Do you think it is wise to wait for few more months and save for the downpayment?

Appreciate your help!!

Bjorn Ahlblad · Answer

@Jason Hall Congrats on the investments. I would not invest OS for 6000/mo rent on a 850k property; not a good enough return if any. I invested in the Bay Area for 30 years. The properties provided little or no cash flow depending on how you measure. But when I sold them it was impressive to say the least. Yeah I think you are stretching-more than I would but we may have different goals and risk tolerance.

Todd Rasmussen · Answer

@Jason Hall

Welcome to the club and congratulations getting started.

If you just started in Jan '22 you should take a little bit of time to see how you are performing before you worry about scale. If you scale an unsustainable business model, eventually you will outpace even significant personal resources.

If you have the resources to buy two properties in LA area in four months, why are you looking out of state? If you are looking to invest for cash flow $6,000 on 850K isn't great. If you are a true appreciation investor, CA will beat almost anywhere in appreciation.

If 2/3 of your debt is your primary, then live on half your annual w2 income and own your current rental properties in 2 years and you'll have cashflow and appreciation returns. You are a prime candidate for debt paydown and as long as you want to live here, CA investing. Also, a base of strong cashflow will look great to lenders for future expansion.

Don't think you are stretching too much, just too early.

Marshall Leipprandt · Answer

@Jason Hall I'm a real estate agent in the Los Angeles area as well as a rental property owner in the South Bay of LA and out of state in Florida. I can understand your appeal to want to look out of state as the price points are much lower. My Florida properties are both Airbnbs which kick off a lot more cashflow than a traditional rental property, but I don't think I would consider investing out of state currently for long-term rentals. My LA property cash-flows a little bit but the long-term appreciation, mortgage pay-down, and tax depreciation on that property are what really move the needle.

In reading your post, a few thoughts come to mind...

1) Let's say that your LA properties are all breaking even after all expenses are paid, well that means that your $500K combined salary is not required to pay for any of those assets and is going strictly towards your living expenses, mortgage on your primary residence, primary HELOC, etc. Unless you are terrible at personal finance (which I doubt), I would imagine that you have a solid chunk of capital still left after all of your big rock expenses are covered.

2) What are your goals? Do you plan to continue to pull in $500K+ per year moving forward in your career or are you trying to pivot to cash-flowing properties so that you can eventually quit your job? If you are planning to continue in your career, I would continue leveraging your high income to buy properties in historically strong appreciating markets like the parts of LA in which you currently own. If instead you are looking for cash-flow properties, I think you could do a lot better than grossing $6K/mo on an $850K purchase price. In fact, you could probably do better than that in midwest markets with 8+ unit apartment buildings, but of course the catch there is that they will not be in A neighborhoods or may appreciate a fraction of what LA likely will.

3) If you're $500K income is relatively stable, I don't see how another property will be stretching you thin. As long as you have strong reserves and are not maxing all of your credit cards each month, you should be fine. Even if you're waiting for the next few months of income to come in, hard money could be an option because you should be having ~$41K a month coming in from your W2s. You could pay that hard money off in full in a matter of months if the terms allowed that. But then again, you could also wait 2-3 months, avoid giving $ to a hard money lender, and find a comparable deal without having to pay someone else a high interest rate.

If I were in your shoes bringing in $500K a year with two rentals and a primary residence here in LA, I would still 100% be looking for another deal. If you want to play it slightly on the safer side, look for an A neighborhood quality duplex or triplex in a location where you want to live. This way, you know you'll have some rental income to offset your new mortgage. You can also convert your current primary residence to a rental and stabilize that as an income generator.

You're already crushing it, but keep making calculated decisions leveraging your strong financial position and income, and you will be off the charts crushing it.

Am I stretching myself?

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