What am I doing wrong?

Question

I have been investing in 3-4 unit properties in Chicago for the past 4 years and everything is going great but I feel like every time I purchase a new property im taking two steps back. Like im taking from Peter to pay Paul.

I have been buying in cash then cashing out on the property to get the next one. I have just recently finished a 3 unit and have it up and running and am now face with the choice  to continue on this path or slow down to pay off some debt.

Any advice?

Jonathan Marcus · Answer

You need to re-access your investing strategy. It seems you are over leveraging your properties which is why you feel like "taking from Peter to pay Paul" as you say. I think you already know the answer. Slow down and pay off some debt and take some of the weight off from your properties. In my opinion, it is better to have fewer properties that cash flows really well than having a large portfolio that barely breaks even.

Walt Payne · Answer

@Frank Gigliotti  As others have said, it is a matter of cash reserves and your comfort level. Leverage is a tool, and just like that power saw many of us have, it can make things easy or it can rip us up. Use it wisely and with due caution.

Paying down your debt doesn't help if your monthly payments don't go down. As @Ned Carey said, build up your reserve. That allows you to get through the most likely of tough times. And if you are figuring that "cash flow" correctly and not stealing the money that should be put aside for maintenance and repairs, that will help make it more secure too.

Mark Elliott · Answer

seriously guys, look into cheaper ways to buy. using the funds from a re-fi from one house to buy more than one new house is growth. growth is what you want to do. make your money work as hard for you as you can. finding houses that are dirt cheap is the answer. there are several ways to buy real estate that are nonconventional.

several years ago, the federal government restricted the number of foreclosures a bank can put back onto the market. consequently, that forced the banks to hold onto the less than desireable foreclosures and market only the best that they have. that added to the carrying costs of the remaining houses that they could not market. finally, they had to make a decision; hold onto those houses until they could market them, or dump them in light of loosing the carrying costs. most banks chose the latter.

so, now, you have thousands of houses that the banks just dumped back to the previous owners by filing a release of lein with the counties that they are in. legally, you have a house that the bank no longer has a claim on, and the previous owners either do not know they own it again or they don't want it. there is potential for a hell of a deal.

i bought one for $2000 on a tuesday and sold it for $10,000 on thursday. i also bought one for $2250 and picked up the back taxes for $4000. that one i am holding onto to rehab and will be worth $50k when i am done.

tax sales are a great place to pick up extraordinary deals too.

your problem is NOT on your cash end, its on your buying end

Mark Elliott · Answer

hi frank. you are not necessarily doing something wrong, but you are looking at things from a wrong point of view. in cashing out these places, i assume you are refinancing them. your tenants are paying for that mortgage with their rents, so, there is no need to " pay off some debts". Let the tenants pay the mortgage.

there are better ways to purchase real estate at extremely low prices if you look around. if you want to increase your cash flow and maximize your use of the " borrowed" money, look into foreclosures that banks have written off and houses that the tax authority has repossessed for back taxes. these are ways to buy more than one place with the funding from one place. that is how you grow

Jerry W. · Answer

@Frank Gigliotti  We all face this question from time to time, and the answer depends a lot on our own comfort level and unique situation.  Some factors to consider are do you have 6 months of emergency money set aside?  it is unlikely you will have everything empty at once but I have had  up to 25% empty in a little over 1 month period.  While on vacation I ended up with a $14,000 sewer bill because someone managed to get a sewer cleanout lid into the sewer line and it plugged hard and we had to eventually dig the line up ouch.

I now have 4 houses open and all but one need work as they have not been empty for awhile.  One will be trashed, its my worst one, another was not finished when folks moved in and I have to gut the kitchen including flooring due to a water leak in a wall, the other is paint , faucets, and some serious cleaning.  I thought I was pretty smart setting my rentals up to all come due in the summer, until I had 4 empty within 2 weeks of each other and all need work.  I am also trying to work on a flip but getting going is now more important.  To complicate matters I recently bought a 3 house package that has been empty for a few years that need work.  it also looks like 2 houses need roofs.

There are always some unexpected costs that come up with rental properties.  Expanding quickly is great, but keep a safety margin.  You are in a better position to know how big of a margin you need than we are.  Good luck

Ned Carey · Answer

Alternatively slow down and build cash reserves.

Account Closed · Answer

Hi @Frank Gigliotti

What's the biggest issue? Cash flow?

It's expensive to re-finance properties these days, too.

Andrew

Frank Gigliotti · Answer

I do feel the same way but i also feel like im one bad deal away from a bad storm!

Account Closed · Answer

@Frank Gigliotti Can you share some numbers with us? How many units total, gross rent, debt, etc.

I agree with @Jerry W. about having 6 months reserves. I always try to keep at least 6 months built up and then reinvest the cash over and beyond that. You can absolutely bet you will hit a bad patch of vacancy and or repairs. If you are always on a razor thin edge of covering your debt service and not much else, you need to back up and re-evaluate.

What am I doing wrong?

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