How to get from the 1st property to the 2nd property

Question

Hello all,

I am looking for advice and feedback for the best way to get to my second property.

Current situation:

My business partner and I purchased a triplex in the Spring of 2012.  Purchase price was $84,000 and we put 25% down with a 4.5% fixed rate for 20 years (Purchased from a couple before it was on the market and got a very good deal on price as they had paid $115,000 for it).  The building is just under 3,000 sq ft and it contains 2 one-bedroom units and 1 two-bedroom unit.  There is also a small laundry room.  We have made various improvements to the units and our gross monthly rent is currently $1,885 which puts our cash flow around $800 per month.

We save all of our cash flow and keep it in a small business checking account.  The problem is even though we now have good cash flow we have spent around $8,000 renovating units which is great but now we only have around $8,000 in the bank.  Our plan all along was to save up the cash flow to use for our next down payment but at the current rate it could be another 2 years.

We have contemplated trying to refinance the property but we realize we may not get terms that are as favorable as we have right now and that would hurt our current cash flow.

A third option would be for each of us to throw more money into the pot. (our least favorite option and we don't have a lot of cash right now)

It was great that we were able to purchase our first property and it is going well but we really want to accumulate more properties and after you spend most of your cash to get the first one it is proving difficult to get a second one.  I feel that once you get to 3 or 4 properties it will start to snowball but the process has been slow so far.  Any feedback is greatly appreciated!

Thanks!

Larry Turowski · Answer

Philip K. Congrats on your first property.  I think most investors would like things to move faster and feel held back by lack of funds, myself included.  Things would be a no-brainer if I could get 100% financing.

Cash is king.  What you have now is gap money.  Enough to fill in the gaps but maybe not to fund a down payment with traditional lending.  It might be enough to secure hard money (or private lending if you can get it).

If you don't want to go that route you are going to need to find a way to bring in more money by clamping down on your expenses and maybe doing some side jobs or doing some wholesale deals.

Jesse Waters · Answer

Philip K. There are a few things that you could do to get into another rental property more economically than shelling out a ton for another down payment.  I'm not completely sure of your living situation, but here is a thought.  If you are willing to move, you can purchase another tri or quad, live in one and rent the rest out, house hacking.  Generally, you should be able to qualify for the property as an owner occupant with a much smaller down payment.  If you and your business partner were both willing to do this, you can end up with two more properties relatively cheaply.  Since you have a business partner I would suggest that you pay rent for the unit you are living in to the business.  At the same time you can rent out the house (if you own & the numbers work) that you were living in.  I would keep that separate from the business.

If you each do this, you now have 3 rental properties in the business and each have one outside of the business.  After the year required for owner occupied property you can either repeat the process or move back to your previous primary residence.

Just my thoughts & suggestions.  I wish I could follow my own advice, but I would have a heck of a time convincing my wife to move out of our house into a 4-plex.

Nicholas Jasmine · Answer

Also,  I think it will be this hard to obtain properties until you get to four or five the compounding should take over.

Nicholas Jasmine · Answer

This is the same problem I'm having.  I was wondering would pulling the money for down payment out of 401k be a option?  I find it amazing that somebody who just started and buy three or four properties in the same year.

Philip K. · Answer

Wow that sounds like an nice deal.  Did you have a lot of built up equity in the duplex?  Just wondering how you financed the $200k from the lender if you had less than $8k in the bank.  I'm assuming they were requiring 25% down?  I haven't thought about owner financing too much but will definitely look into it.

Brandon McCombs · Answer

I had a similar problem recently. I had even less cash in the bank than you and over $25k (17k down payment and about $8k) tied up in a duplex that I bought last year. I clear about $400/mo with it. But in April of this year I saw a local apartment building that I had my eye on have a 50k price drop down to $245k. I thought it was within my reach but I would need creative financing to assist with the down payment. My step dad suggested I ask for owner financing. After a couple weeks of email negotiations we had settled on a deal where the owners would provide $60k financing and I would borrow $200k from my existing lender. I close on the deal next week and will have over $20k in my pocket afterward to use for contingency and minor renovations to get the building above the current 40% occupancy.

So I recommend trying to find a deal where you can get owner financing to assist with the liquidity problem. I also agree that you shouldn't refinance, as long as your existing units continue cash flowing to pay the bills.

Oh, and I plan to sell my duplex since it is 90 min away, one way, from where I live and this new apt building and will be chump change from an income perspective. So I'll be able to pull my cash out of it.

Philip K. · Answer

Larry

Thanks for the input.  Have you had good experiences with hard money or private lending?

Philip K. · Answer

Curt

Thanks for the advice.  I will take a look at hard money lenders.

Curt Davis · Answer

Dont refinance, leave the current loan alone.

You guys could borrow a hard money loan to cover the purchase and rehab and one renovated refi out.  This will only work the way you want if there is enough equity based on actual appraised value and all in cost.

I have done this for all my 19 personal investments.

How to get from the 1st property to the 2nd property

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