How to expand past 2 properties?

Question

Hello Cincinnati BP! I did an owner occupy duplex deal in 2018. Fantastic learning experience and start to building up a rental portfolio. I just refi'd and did another owner occupy into a SFH in Norwood. Planning on seasoning and renting this out in a few years. But,

I want to get Property #3 within the next 12 months. I'm not sure which angle to take. I'm researching:

1. Hard money loan. Buy a low priced bldg with hair, fix and bring rents up to market, refi and pull cash. (I know some of these details but not all, I've never tried HML)

2. Do a conventional investment loan at I'm hoping, 15-20% down. But I'm not cash flush yet I would struggle with a down payment.

I'm not afraid to put personal work in on some basic renovations and contract out the rest. Cost effectiveness is key on #3 I'm just stuck on how to scale effectively. My goal is to build up a 8-10 unit portfolio over the next 8 years or so if possible. That's the dream at least. Any thoughts are very much appreciated, cheers!

Michael Craven · Answer

@Andrew Cheek You’re off to a great start already! I think your ideas of how to grow are pretty good. Definitely hard money is an option if you have a good enough deal. If it looks like you can refi enough out to pay back the HML after 6 months or so then you just need to save up for whatever the lender requires (some still require 20% of purchase price but cover 90-100% of rehab)

If you know any friends or family that can be a private money lender that would be another way to scale a little more quickly.

You could also partner with someone by either doing 50/50 equity and money invested or you could be more boots on the ground and bring less to the table money wise.

Other than that, you could get a line of credit on your current home to serve as a sort of short term loan to your business.

Lastly, many investors do a few wholesales or flips to generate more capital to invest.  Biggest downside to long term rentals is that it’s slow to scale at the very beginning but as you can momentum you can start to scale more quickly.

Hope this helps a little, few free to reach out if you want to chat any more!

Joseph Cornwell · Answer

@Andrew Cheek I was in your position a few years ago, I am also a Cincinnati investor. I would be happy to talk specifics about your situations and goals, feel free to reach out and we can set something up! I have no doubt you can scale up much larger or faster than you imagine if that is your focus.

Jordan Noble · Answer

@Andrew Cheek Hey Andrew! My personal opinion is you need to master either rehab or creative financing (or both!) to scale quickly in the beginning.  Below would be my 2 suggestions for whichever route you took:

Rehab:

-Use HML to BRRRR a distressed single or small multi family deal and refinance after 6 months ( I have a HML who will lend 90% of purchase price and 100% of the rehab as long as you can prove you have done one deal - message me if this interests you).   This will allow you to get into a property for little money down, fix up the property and refinance to long term debt and ideally get the little money you put down into the property back to do it again.  To really scale, partner HML with private lenders so you can do a few at a time (this is what i currently do.  it is a lot easier to go to a private lender and ask for $25 or $30k to use as your HML down payment than to ask for $250k)

Creative Finance

- If you find a really great deal, you can do some form of creative finance.  An example of a duplex i just bought in norwood was a great off-market deal that was way undervalued.  I combined private money and hard money to purchase it and am about to refinance and pay all of them off without doing any rehab! Cashflow from day one - this required both creative finance and a killer deal but allows me to own a cashflow duplex with 25% equity with no money out of pocket just because i found a great deal and was able to put it together.

- I have not done one but am working on a subject to deal which would allow me to gain ownership of the property while the orgiinal owner keeps the mortgage in their name and i make the payments for them.  Listen to Biggerpockets episode 529 that just recently came out because this gave me a lot of inspiration to start putting this deal together.

Hope this helps!

Andrew Cheek · Answer

@Eric Fernwood This is so helpful wow thank you for breaking down the 2 models so well. I love the high appreciation side. Hard money is a world I might not yet be ready for since I still have a day job and not to much contracting experience. I do like the 5 yr cash out refi. Cincinnati is red hot and rents are going up. I have about 45k in equity on the duplex but just refied it as an investor loan so I could owner occupy property #2. I'm thinking both a HELOC or cash out refi might have to wait for seasoning but not 100% on that. If I can pull around 25k out of the duplex in a year or so that will help to get to prop #3. I will probably live myself in this SFH for a few years.

This thread has been a world of help though. A lot of options and I'm ok with exploring them all. Quantity is my goal. Prop #3 inside 12 months.

Jon Kelly · Answer

@Andrew Cheek either option is great. If coming up with the down payment is a problem, then you can choose #1. It's great to understand the possibilities and not put limitations on yourself. Start networking with HMLs in your market so you can be prepared to go with #1 if you don't have the down payment.

8-10 properties in "8 years or so if possible" isn't a real goal. Pick a number and defined timeline. "8 years of so" is too far into the future and probably doesn't excite you too much. Shorten it to 1-3 years.

Andy Crawford · Answer

@Andrew Cheek Congratulations on pushing forward and planning your next buy.  You’re taking action which IMO is a big part of progress.

I’m actively investing in Cincinnati & Dayton.  I’d be happy to connect and see if I can add value.  Don’t hesitate to reach out.

Bud Gaffney · Answer

@Andrew Cheek HELOC or house hack! Keep it rolling.

Eric Fernwood · Answer

Hello Andrew,

Congratulations on a great start!

I do not know the Cincinnati market, so I cannot offer any specific recommendations. However, I will comment on hard money loans and expanding your portfolio.

Hard Money Loans

My experience with hard money loans is that they are expensive and short-term. They are not a substitute for long-term financing. The last hard money loan a client did was prime +5%, 3% loan origination fee, 25% to 40% down, 6 to 18 months term, interest-only, amortized of 20 years. After that, the full loan amount is due, so you would need to get long-term financing anyway. I see a limited advantage to using hard money unless you need short-term money to buy and renovate a property before getting long-term financing.

Growing Your Portfolio

I have found that if you invest in a high appreciation market it can help expand your portfolio faster. That is what I personally experienced in the Las Vegas market. To illustrate this point I put together a simple model comparing five-year investable cash accumulation for a high cash flow market vs. a high appreciation market. To keep the model simple, I made the following assumptions.

• High appreciation market - appreciates at 7% annually, but has zero cash flow.
• High cash flow market - 7% cash/cash return but zero rent growth and zero appreciation.
• Combined state and federal income tax rate is 30%.
• Purchase price: $400,000.
• Down: 25%
• Acquisition cost: $100,000 (25% X $400,000)
• No inflation
• No rent increases
• In the high cash flow market you accumulate all rental income.
• No loan costs
• No closing costs
• No renovation costs
• No vacancies
• No maintenance cost
• No management expenses
• No principal pay down

As you can see, at the end of 5 years you will have a lot more investable cash from the high appreciation property than the high cash flow property, which you can use to purchase more properties. In reality, rents will rise in a high appreciation market which will give you more investable cash.

Appreciation and Rent

Appreciation is much like the spots you see on your skin if you have measles. The spots are not the virus. The spots are a symptom of the virus. The same is true with appreciation. Where you find rapid appreciation you will find a growing population, significant job creation, and a generally desirable place to live. Under these conditions, both property prices and rents will increase. There are studies showing that property prices and rents are connected. However, property prices typically lead rents by 2 to 10 years, depending on the market. So, if you see significant appreciation today you can reasonably expect to have significant rent increases in the future. My point is that if you buy in a market for appreciation, your rents will rise as the property prices rise. It is not all appreciation or all cash flow.

Andrew, I hope this helps.

Bud Gaffney · Answer

@Andrew Cheek leverage! Borrow against those properties. Keep going!

Timur Salikov · Answer

I was just suggesting if your debt to income on paper wont qualify you for another loan, you can transfer them to an LLC and the company will get a commercial loan. Yes the terms will be worse but at least you wouldn't have them off your credit anymore. Also now you could quality for an FHA down 3.5% loan so it would be easier to buy the next house. *The bank can call the loan due if you transfer a property to LLC so you can get insurance for that. 99.9% if you make your mortage payments on time this wont happen.

How to expand past 2 properties?

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