How do you think about new deals when your combined ARV > your capital base?

[Clayton Newman]

I am new to BRRRR. One consistent thing that keeps coming up in my research is how to handle scaling.

I'll try and dumb it down so it's easiest for me to explain: consider hypothetically starting with $1m and BRRRRing ten $100k properties that each cash flow $1k/mo. Let's also say that these ten properties were magically refi'd such that there was zero slippage (eg every cash purchase managed to pull the same amount out in the re-fi after seasoning).

How do you think about personal finance management when you're continuing to add deals at this juncture (ie your port arv = your capital base)? Is there some rule of thumb you think about when it comes to what you need to be seeing to continue to add deals?

I'm worried about a couple of different things. One, lenders may start cooling down on offering me new deals because they see that my total debt is 700k'ish (30% down on each deal, let's just keep it simple) against my equity of 300k and my cash flow of 10k/month. And if that seems totally reasonable, let's add a zero to everything (7m debt, 3m equity, cash flow 100/month, capital base 1m) and run the same hypothetical.

I'm not aware of some magic number or rule of thumb, but my gut says that when my total mortgage debt becomes meaningfully larger than my capital base I need to pull some levers and tweak some stuff before I can continue adding (eg move some cash flow to grow capital base or pay down more to equity).

Is this making sense at all? 

Thank you for reading

[Mike Dymski]

Quote from @Clayton Newman:

Thank you for the reply.

I agree that executing in this environment is challenging, but I am glad to hear that the above is not problematic. I have a lot of experience in finance but not RE and I'm wondering if this degree of scale (debts>capital base) constitutes "leverage" (I don't think it does if my DSCR is meaningfully positive... maybe if I'm allocated to a single market I introduce black swans, I dunno).

Having read the BRRRR book I didn't really see much on how to protect against random downside scenarios when port gets huge. I guess it's a case where cashflow across enough properties makes this less of a headache, but this post was more just me making sure that I have my bases covered against an unknown unknown.

Many of us would never purchase a property in a location that would have concerns for an extended period of vacancy, even during economic downturns.  The eviction moron-atorium in red states was unprecedented but covid squatters were rare and manageable with a larger portfolio (less so with a small portfolio).