getting started in BRRRR with $1M cash and $1M+ assets? leverage

Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes

6y

Originally posted by @Mike Franco:

I need a strategy.

I'm retired, but never got into the BRRRR. I have $1M cash and $1.5M in paid off real estate assets, no debt, and no 'real' income. 830 FICO.

I want to leverage my assets and start BRRRR to secure retirement for the kids, getting the ball rolling so they can have paid off properties by the time they retire.

$1m cash isn't really enough to buy many cheap properties in Socal. So I want to use the bank's money as much as possible.

How do I get the ball rolling fast?

I don't understand how the numbers work for subsequent BRRRR properties without much income. Hear me out...

I buy a $300k house cash. $50k rehab. $500k ARV. Rent in Socal is ~5% cap rate, so $2100/month gross rent.

I'm down $350k already, and I need to replenish the $350k.

Will the bank really lend me $350k cash out refi 70% LTV with only $25k gross rent as the only source of income? How do you even fund subsequent BRRRR properties with bank money in my situation?

I have enough assets and want to use the bank's money at the lowest interest rate possible to grow a BRRRR portfolio as quickly as possible.

What realistic timeline am I looking at here?

I'm hoping to acquire 10 BRRRR houses that are $500k ARV, which I expect will all be worth $750k after 30 years, for a total holding of $7.5M at the end of 30 years, which the kids can sell and retire off of.

Mike,

Care to adopt an adult?

Just kidding. Seriously, though, what a great plan. You've got some lucky kids.

If I were you, I'd call a loan broker or two, explain the scenario, and see what they say. The only hiccup is that you don't have current income, right?

Can your paid-off real estate serve as additional collateral? Maybe you should also call some local credit unions; they might be game for a scenario like this.

Good luck!

Jon

1 Reply

Mike Franco

OP

Los Angeles, CA · Member since 2013 · 555 posts · 261 votes

6y

yeah, the paid off properties can definitely serve as collateral.

But I'm wondering what interest rate I'd be paying for loans financed this way.

I don't want to pay loan shark rates.

which site is the best place to find a loan broker in LA?

Should I just hit up yelp and zillow ?

1 Reply

Daniel McNulty

Financial Advisor · Indianapolis, IN · Member since 2018 · 294 posts · 165 votes

6y

@Mike Franco

That is an incredible gift for your children.

You might consider syndications instead as they will be much less hands on work for you.

Over that same time period (30 years) you can conservatively expect to reach that 7.5 M target many other ways with potentially much less sweat equity.

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Mike Franco

OP

Los Angeles, CA · Member since 2013 · 555 posts · 261 votes

6y

@Daniel McNulty

Hey, Donald Trump's dad gave him such a gift. I should be doing the same.

I don't mind sweat equity. I might even want to ramp up to 20 units for a $15M target.

Can syndications really turn $300k into $7.5M in 30 years like an infinite BRRRR can?

Syndications typically return less than 10% yearly, which isn't much different from the S&P 500.

300k would be just over $5m after 30 years compounded at 10%, if it even hits that. At 8% compounded it would only be $3m.

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Daniel McNulty

Financial Advisor · Indianapolis, IN · Member since 2018 · 294 posts · 165 votes

6y

@Mike Franco

It would depend on the asset type you are looking for. Core properties would probably be less than 8-12%, value add should be 12-18%, opportunistic is 18%+. The classification is normally based on property type, condition and vacancy rate to name a few. This even excludes the tax benefits you can expect from them, just like direct ownership.

300 k compounded at 12% for 30 years would put you just under 9 M.

That being said, its tough to compare to the control provided in Brrrr you described. However, it might take you 10 years to find 10 properties that work out as well as the scenario you described above.

Its just a matter of preference. As they say, there are multiple ways to skin a cat.

1 Reply

Alex BekezaBusiness Member

Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes

6y

@Mike Franco Most areas in SoCal are not the most BRRRR friendly for single family homes in terms of being able to cash out at high leverage, walk with most of your initial capital investment in cash out proceeds, and leave behind a property with strong cash flow. The rents are just too low compared to the values. 2-4 units can be an exception. SoCal is unmatched for appreciation but rather poor for cash flow.

"Will the bank really lend me $350k cash out refi 70% LTV with only $25k gross rent as the only source of income?"

It depends if the property will cash flow that high or not. If you're only collecting $2,100 in rent the property won't debt cover at 70% after considering taxes, insurance, etc.

You're definitely in a great spot to do some value add investing in your position and the long term appreciation aspect makes sense but single family homes in SoCal won't be the most efficient vehicle for BRRRRs.

Since you're not reporting much personal income being retired you may want to rely on commercial lending programs that are based on the properties DSCR (cash flow) rather than the borrower's debt to income ratio. Don't let the word commercial fool you because these are viable on 1-4 unit resi properties as well. They'll allow LLC vesting, have no limit on the number of finance properties you own, and generally be friendly towards value add projects. All of this being said, you need to identify an area where the rents vs. values make this possible.

What market are you considering? There are a few outliers in CA where I see this working well.

[email protected]818-606-8823

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Whitney HuttenPro Member

Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes

6y

@Mike Franco Yes! You can reposition the properties to have cash on hand to BRRRR. In CA? Well... not sure you will find the BRRRR deal there. You could move to the Midwest markets and do this out of state. You could skip the SFRs and go for a 10-20 plex and do this one time with one loan (personally, this "Monopoly" style investing would be my favourite for you) with far less competition.

Also, I may have misunderstood, but have you considered teaching your kids how to invest alongside you? Instead of doing all of the work and then handing it to them? I'm a parent myself... and while I will hand over my portfolio one day, I feel the best thing I can do is teach my kiddo how to run it and keep it growing.

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Mike Franco

OP

Los Angeles, CA · Member since 2013 · 555 posts · 261 votes

6y

@Alex Bekeza I'm in the san gabriel valley, so I was limiting my area to where I could drive occasionally.

So my area would span a 50 mile radius, from thousand oaks to san bernardino/riverside to orange county.

I'd be willing to increase that distance a bit to find deals though.

Where are CA outliers located?

Everywhere I look in socal, house values have skyrocketed and gross rents are in the single digit percents.

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Jon Schwartz

Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes

6y

Originally posted by @Mike Franco:

@Alex Bekeza I'm in the san gabriel valley, so I was limiting my area to where I could drive occasionally.

So my area would span a 50 mile radius, from thousand oaks to san bernardino/riverside to orange county.

I'd be willing to increase that distance a bit to find deals though.

Where are CA outliers located?

Everywhere I look in socal, house values have skyrocketed and gross rents are in the single digit percents.

Mike, I've been following this thread to see what kind of answers you've been getting. I love this problem. How do we turn $1M cash and $1.5M of paid-off real estate into $7.5M in 30 years without any income? And your area of focus is where I focus my investing, too.

First, let's take a look at your assumptions: You want 10 houses at $500K ARV that will each be worth $750K ARV in 30 years. Since 1975, LA has averaged 6.7% appreciation each year. So going by the longterm average, those 10 houses would be worth more like $3.5M each in 30 years! If we assume a more conservative 4% appreciation, those 10 houses will be worth about $16M in 30 years. You could hit your $7.5M goal with just 5 houses.

But I don't think you should buy 5 houses. You should buy a 5-unit (or bigger) apartment complex. If the building is 5 units or more, it gets underwritten my the lender, not you! That means that the property's income has to quality for the loan, not yours. As you don't have income, this is a good thing for this situation!

The caveat is that you might have to make a larger down payment to ensure that the property's current income covers its debt obligation. You might be looking at a 40% down payment. Fortunately, you have cash on hand! $1M is 40% of $2.5M, so you could buy a pretty decent building.

Since your advantage here is time, you should target the most promising area you can find in Socal. Where will rents be the highest relative to where they are now in 10 or even 20 years. As the building's rents climb, so will the building's value, and you (or your heirs) will be able to refinance out equity for living or further investment.

I think coastal areas and LA suburbs are your best bet. I wouldn't buy a property on the coast for few of what climate change might do to the coast over the next 10-20 years, but I'd buy near the coast. They aren't making anymore coastal land! And as transportation modernizes over the next 10-20 years (hello, self-driven cars!), homes that were once a painful commute will become a much shorter drive. (Obviously, I think COVID-driven city flight is a temporary phenomenon.)

Anyway, I'd love to keep figuring this out with you!

Best,

Jon

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Alex BekezaBusiness Member

Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes

6y

@Mike Franco I'm seeing people actually defy the rule that you can't BRRRR sfrs in CA in areas like Visalia, Bakersfield, Tulare, Fresno, etc. I'd be happy to connect on the phone and chat more.

[email protected]818-606-8823

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JDee Moore

Specialist · Tulare, CA · Member since 2014 · 72 posts · 48 votes

6y

@Alex Bekeza @Mike Franco @Jon Schwartz

I’m familiar with those hard to find pockets of opportunity in the 559 and 661 area codes (Fresno county, Tulare county, Kings county and Kern county). Its important to recognize those hidden rough areas (C-, D and F) within these rural areas which from a “non-local’s” point of view might look like a “B” but all the locals know it’s more of an area that is on the decline, fast.

If interested I can bird dog some deals and if needed can also underwrite deals with full analysis of the area including comps, school districts, development and trends. Let me know if I can be of any assistance. Thanks.

1 Reply

Brooke WilsonPro Member

Realtor · Bakersfield, CA · Member since 2017 · 60 posts · 17 votes

6y

As a Kern County Realtor, I guess one caveat I would add is that you might get cash flow here in Bakersfield, but you won't see the kind of appreciation you will down in LA County. We see some BRRRR's purchased at +/- $100k, with ARV at $160k, and a rent of maybe $1200 at that pricepoint/neighborhood. My friend has a couple duplexes in Los Angeles, purchase price $800k without the need for renovations, rents for $3500 per unit. That's less work than managing 6 homes in Bakersfield for the same output in cash, and with better appreciation long term.

I like @Jon Schwartz's approach of 5+ units, and love the idea of tenants paying down a coastal property for you, and the differences between a commercial loan/property and a residential loan/property.

I agree with @JDee Moore - knowing these pocket neighborhoods of C-, D, and F appear different to an outside investor.

2 Reply

Charles Cooper

Real Estate Broker · San Pedro, CA · Member since 2016 · 206 posts · 89 votes

6y

@Mike Franco

Buy under valued units.

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Aaron Norris

Lender · California and Florida · Member since 2008 · 319 posts · 194 votes

6y

@Mike Franco - I hope you take a step back and really think about your lifestyle and how much stress you want in your life. In retirement, most people are looking for less stress and less risk. My idea of less stress is not a portfolio of rentals in Kern. Whatever you buy at this moment in time, be prepared to go long. California is hard to make cash flow unless you're looking in tertiary markets or strategies like vacation rentals which have a lot of political risks due to affordable housing. I have personally be upgrading to new properties on the east coast in strong markets. Easy to get financing on new homes, they cash flow out of the gate as long as you don't take on too much risk, they attract good tenants at higher rates, and I don't have issues with repairs for a while. If you go after fixer-uppers, keep in mind you'll have the outlay of repairs which is not just money, it's time. Because the market is hot, contractors have become an issue and prices for labor as well as materials are up. Just be careful. With your cash and credit, you certainly have options. One other suggestion, go to a local bank. PLEASE. If you select an area, speaking to a local bank, they are dedicated to an area and many investors are getting some sweet deals on lines of credit. Since you have cash, they will pay attention.

2 Reply

Rachel S.

Investor · Los Angeles, CA · Member since 2019 · 127 posts · 63 votes

6y

Originally posted by @Mike Franco:

@Daniel McNulty

Hey, Donald Trump's dad gave him such a gift. I should be doing the same.

I don't mind sweat equity. I might even want to ramp up to 20 units for a $15M target.

Can syndications really turn $300k into $7.5M in 30 years like an infinite BRRRR can?

Syndications typically return less than 10% yearly, which isn't much different from the S&P 500.

300k would be just over $5m after 30 years compounded at 10%, if it even hits that. At 8% compounded it would only be $3m.

Hopefully your kids are more deserving than Donald Trump. lol

1 Reply

Darius Ogloza

Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes

6y

How much income is currently coming off your cash and real estate?

A net worth of $2.5 million should be throwing off at least $100,000 in annual cash (using the 4% metric).

If you peel off $350K from that total (as in your example) your remaining assets should still be generating $86,000 while your additional $25,200 in rental income from your BRRR should result in a total annual income of $111,200. The monthly payment on a $350K loan at 3.5% is about $1,600, which is $19,200 annual or 17% of your $111,200 income. This should qualify.

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Adam Rose

Real Estate Broker · Simi Valley, CA · Member since 2020 · 3 posts · 3 votes

6y

I agree with most of the suggestions in this thread. You are in a good position right now, better than most I'd say. As a retiree, you may want to consider a NNN property as it is more hands-off and similar to a bond with lower, but consistent returns. Whatever you choose, make sure you have a good team alongside you and the future should be bright.

1 Reply

Sanjeev Advani

Investor · Bakersfield, CA · Member since 2015 · 483 posts · 234 votes

6y

@Mike Franco it sounds like you have a pretty good plan already in place with your purchase and rehab plan, however, I think you might be able to simplify that plan and start buying cash flowing properties at higher cap rates rather than having to fix them up and get returns as well.

For example, if you take your $1M cash and leverage that you would be able to purchase around $4M in real estate. Based on that $4M purchase price, you should be able to purchase around 16 homes in Bakersfield producing an average rent of $1700/month/property. If cash flow is not your end goal, then this could be a good option for you.

If you are looking for cash flow then a variant of this strategy could also work well in the Bakersfield area. Since you are also retired, it might be best to give those properties over to management and let them handle the headaches so you can retire in peace and your investments are being watched after until your kids decide to retire in the next few decades.

I would also look at Bakersfield because of the appreciation potential over time. Not only are we a fast growing city right now, but one of the larger cities in CA. With all of the future development coming, I believe that there is a lot of growth potential moving into the future for Bakersfield.

Feel free to PM me to chat further as well

Best,

Sunny

0 Reply

Stacey MccormickPro Member

Member since 2020 · 8 posts · 6 votes

6y

Hi Mike.

What a wonderful thing you're doing for your family!!! Sorry for the long post. I know you asked about BRRRR strategy, but may I suggest some other strategies to think about based on my own experience in investing, and my conversations this past month with lenders. You have a good situation there, and so you have a lot more options than most new investors. I used to live in California for a period of time and I know it's difficult to find homes in your area around $350k? When we moved there we had to overbid by $150,000 for a 1952, 1000 sq ft home because there were so many dot.com tech startup people like us moving to San Fransisco, so therefore overbidding was standard practice for many years. Anyway, is there a reason you want the homes to be in California? Will the children also be living in them or not? If not, and the homes are just an investment for the future, then you may think about purchasing outside of California where your money will go further. I had a similar situation here in Denver last month where prices for homes/real estate have skyrocketed n recent years. I was debating on purchasing a portfolio of homes or my second multifamily (MF) property in or out of Colorado. I was able to find a 30 unit MF property outside of Denver but still in Colorado and here is something to think about. Just as an idea, you can purchase a larger MF property (30-60 units), or a portfolio of 10 homes outside of California that can be purchased all at once and where your money may go further. Depending on the time and energy you have, this is also quicker than BRRRRing 10 homes-one at a time. I have investor friends here that only buy large MF and I also have friends that own a portfolio of 12 homes. I also have friends in Florida and Arizona and they invest in both asset classes. Prices in those two states are much less than in your area. For example, if you want to fast track the process, you can buy a SFH portfolio of 10 +/- homes. That way you're buying them all at one time and making a single purchase and it may solve the financing/refinancing issue. I'm not a lender so I don't know the details of refinancing a portfolio of homes after the fact, but you can ask some lenders. As far as hard money lenders, and based on my own discussions with them this past month in determining financing options for the 30 unit MF property I'd like to purchase, some lenders told me that they will offer a 5% interest as a starting point depending on the circumstances. The down payment would be between 10-20% and some fees/points again depending on the deal. For example, your excellent credit score and your cash and assets may help in getting a lower interest rate and a lower down payment. But then they also look at the age of the property(ies). I was told that If they are too old (over 30 years old) they may ask for more money down. Also, because these are considered commercial properties, the interest and down payment may be affected by your own experience as an investor. I also recently found out something I didn't know or maybe the rules have changed. SBA will still finance MF properties, however, they are stipulating that the owner has to live in 51% of the property which didn't make sense to me or my banker. Otherwise, they have a great loan program 504?? which allows for 10% down and 4% or so interest rate with a 30-year amortization which they will loan on for hotels. The only thing is that the SBA loan is a recourse loan which means you have to sign that you will be personally liable for the loan. Again all this is what I found out recently. I have experience in investing in various asset classes including industrial conversion, retail, and car wash. But my favorite projects were a land development project of 4 vacation villas and a large MF property, both because I enjoyed the experience, and I have realized the highest returns on investment. There is another strategy depending on how much work or involvement you want in the project. For example, recently I met with a representative of a self-storage REIT with a hands-off approach and where the annual returns range from 8-25% depending on what stage of the project you get in on and they pay their investors first. It is also another strategy to think about. Let me know if you have any other questions on the cash flow and equity calculations/benefits of owning large MF properties. I hope this was helpful. Good luck!!!

1 Reply

Stacey MccormickPro Member

Member since 2020 · 8 posts · 6 votes

6y

I also wanted to mention that with the large MF properties there is enough cash flow to hire a professional management company, so you don't have to be hands-on and it makes things easier for out of state owners. You just have to vet the management company.

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Stacey MccormickPro Member

Member since 2020 · 8 posts · 6 votes

6y

I love Sunny's strategy.

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Tim Winter

Broker · Phoenix, AZ · Member since 2015 · 151 posts · 55 votes

6y

I think like others have mentioned, why in retirement would you want the stress of rental properties? I know for myself as retirement approaches I'm moving the portfolio towards financed or notes.

Have you thought about doing a buy and rehab, and then selling them on lease option or seller financing? Eliminate the tenant factor, create steady income, and in the process show your kids how to do it as well? Then when they "take over" they know what to do when one of the units refis out so they can do it over again?

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getting started in BRRRR with $1M cash and $1M+ assets? leverage

getting started in BRRRR with $1M cash and $1M+ assets? leverage

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