Best Real estate strategy?

Question

My name is Cyrus Jones, I am 28. I just wanted to get some advice for my specific situation. I have a decent paying job, one rental property and I am privileged to veterans benefits as well. With all my income I am able to save about 40-60k a year for investing. The only problem is that recently I decided to start putting all my investment funds toward my consumer loans averaging about 6% interest. In doing so, I do not have any cash on hand to invest. However, If I started allocating my funds towards real estate temporarily; I may be able to take advantage of the opportunities coming in the next year or so to make 20% or more. Justifying the shift in funds.

My question is what would you do in my situation to build a rental portfolio as quickly as possible? What is the best strategy to find properties, finance them, and acquire them as quickly as possible. My goal right now; I would say is to get 30-50 properties as quickly as possible. I have considered "BRRRR" but as I have learned more recently a BRRRR doesn’t really work unless the purchase and renovation are made in cash which would lock up a lot of capital for at least 6 months not to mention it would take me about 3 years for me to save enough to buy my first one. Not to mention it would take 15-30 years to acquire 30-50 properties which is not ideal. I also considered flipping and using a 1031 to buy BRRRR. That way I can leverage my money, do more flips with the same amount of money it would take to buy one BRRRR and refinance at the end of the BRRRR to buy even more BRRRR deals. From what I can tell, a flip, then BRRRR would be the fastest way to do what I'm trying to do assuming I can find viable deals quickly and consistently. Are there other strategies that I am missing? I understand that this would not be legal advice. I am interested in your opinion based on all of your experience over the years as what you would do knowing what you know now. Any advice would be much appreciated.

Matthew Terry · Answer

Cyrus,

Congratulations for taking interest in REI at 28 years old! I'm a new investor as well and here is a glimpse into my story. We did not start investing until the vast majority of our consumer debt was paid off. This allows us to build up reserves fast, have a lower debt-to-income ratio to get better financing terms, and it just feels more secure.

I started investing late last year by moving into a new primary residence and turning my old one into a rental property. We moved into a house well below our means in price and size, but with great location and nearby amenities. We did this for three reasons:

1. To prepare for this exact situation, a black swan event, although I was thinking about job loss or major medical expenses, not a pandemic. With an easily affordable mortgage and relatively low utility payments on a 2,000 square foot house, we are confident we will pull through without much financial hardship, even if we had to pay the PITI of our rental out of pocket.

2. To maintain good net income to be able to save up for more properties. We only increased our monthly payment by $300 in our new house, yet we are cash flowing around $400 from our rental property. This was our way of "house hacking" without needing to live with
ear strangers.

3. This will eventually be another rental. We received a 3.2% interest rate and bought below market value. The plan is to live here for 2-3 years and then make this a rental, but we will be perfectly content to stay longer because of COVID-19.

I'm looking at Phoenix, where I live, as my "appreciation" market to engage in flips and live-n-BRRRR and use appreciation to finance deals in cash flow markets like Oklahoma City, Kansas City, and Memphis. At the beginning of March, I correctly speculated that the stock market was going to drop hard, so I cashed out a chunk of my Roth IR contributions (no income tax or penalty). I'm currently under contract for two Section 8 C+ properties in OKC to deploy that capital. My reasons for this are:

1. I want to convert cash to equity because I feel inflation will rise due to trillions of stimulus dollars being injected into the economy.

2. OKC is a historically stable market and I intend on keeping these for decades, so there won't be a crazy drop in property value after I close and I won't be affected by any drop since I'm focused on cash flow. Rents were also stable or rose in recession.

3. The government will cover rent enough to cash flow in case the tenant loses their ability to pay. I thought this was prudent considering over 20m people are unemployed now.

4. Conservatively speaking, in 20 years, I'll make about twice the money as I would if I left that money in my IRA and I can use my some of my gains immediately (cash flow), rather than at 59.5 years old.

I'm in the process of doing a cashout refinance on my rental in Phoenix because rates are so low and I have 50% equity in the property. We are doing a cashout refi for 69% LTV because you get a better rate staying under 70% LTV and so I'm not over-leveraged in the wake of a crisis. We were debating whether to wait and see what happens to the market but then decided that we would rather have the cash now than to risk lenders tightening up later. Again, because we live below our means and have no consumer debt, we can afford the extra $300 even if our tenants can't pay rent. This will increase our mortgage by about $300 a month, but I believe we can reinvest this cash into other properties and get close to $600 in cash flow (20% down) and still have 6 months reserves. I'm paying around $200 a month in maintenance services for my rental property which I will take on myself to mitigate the cash flow decrease until I can reinvest that cash. This maintenance will take me about 8 hours a month to complete. So with 8 hours of my time per month, I'll be $500 net positive in cash flow. I can then take back that 8 hours if I choose by hiring landscapers again.My point in explaining all of this is that there are many ways to start investing, but each investment should be very calculated in terms of risk, numbers, and what works for your personal situation. I feel that trying to find the "fastest way to build a portfolio" may be a very risky mindset. Additionally, BRRRR method is one of the riskiest strategies in a financial crisis because you are speculating, taking on risk of a rehab, have capital locked up for several months, and your success is at the mercy of lenders when it is time to refinance out of the hard money loan you needed to buy a property for cash.

I also thought I wanted to do nothing but BRRRR when I first started reading and listening to BP. The enticement of rental income without spending money is real. However, I've come to the conclusion that I need to build up my network of REI professionals more, gain more experience and credibility as an investor, and save up a larger chunk of capital before taking on BRRRR risk.

Joseph Cacciapaglia · Answer

Focusing on making money quickly, is the fastest way to lose money. Most of the successful investors I know are much more concerned with capital preservation first and growth second. Real estate is a chunky business, so it's often difficult to get the ball rolling. Many investors can't see the path from one property to financial freedom. I find that it's often helpful to do some math and realize the power of compounding.

The first couple of properties may come slowly, but as you build your expertise and your portfolio, it will get easier and easier to acquire more. If you're currently saving $50K+-/year, it shouldn't take you 15+ years to get to 30 properties. I think having a goal to get there in 5-10 is perfectly reasonable. You could certainly get there even faster, but that will depend on your ability to attract OPM.

I don't think you need to pay off 100% of your debt prior to investing. I like to pay off any double digit debt I happen to incur, but don't mind keeping the low single digit debt. I'd rather invest my money where I know I'm getting a better return. That's all about your risk preference though.

Alyssa Dyer · Answer

@Cyrus Jones as someone mentioned above with 50k a year you could hit 30 properties far sooner than 30 years. Holding aside 2k per property for mechanical reserves you could easily lock down two a year in OKC. This type of property would be lower risk than a BRRR. I like to look at deals that haven't been fully flipped so you're not paying top of the market prices, but that don't require any major rehab in order to keep cash flowing.

I'd think about starting with a few cash flowing safer deals with your extra capital, developing a relationship with a provider through those, and then utilizing that relationship/market to help you with a BRRR or other creative ways to increase returns.

Whitney Hutten · Answer

@Cyrus Jones there are two parts to your story that make me take pause.  1. You have so much consumer debt.  This might make it extremely difficult to get financing on real estate. Also, you aren't investing from a position of strength with having that much.  2. The focus on the need for speed to build your portfolio.  Real estate is a long game.  Can it be done quickly? Yes, but those who go in with the mindset of learning the industry and how to invest wisely make far less mistakes and make more money in the long run.  Time in real estate is a powerful wealth builder.

My suggestion is to start reading more about BRRRR investing (David Greene has a great book) and set a timeline to get that consumer debt gone!  I think the bulk of the "deals" from COVID-19 will come later in the year (late Q3-Q4-Q1) as the bottom really falls out for some.

PM me with Q's!

Kirk R. · Answer

are you already using your va loan?  just buy something that cash flows. a sfh to quad.  get more experience less risk going OO

Jerryll Noorden · Answer

Dude, look you have to think outside the box.

Lets dissect your goals and not assume the route everyone will take. This is how you become the top 3% of... well anything.

You want to grow your portfolio ASAP right?

OK so what do you need to grow your portfolio using limited funds?

Cheaper deals right?

Now..

what do you need to grow your portfolio ASAP?

An influx of leads coming in... right NOW!

So address these to things and you will satisfy your self imposed criteria.

What gets you the cheapest deals?

Finding motivated sellers does.

What gets you as many of these motivated seller leads ASAP?

Marketing like a brilliant man (Note.. I didn't say just "marketing"). Be smart!

All that BRRRR, and financing this and that.... here is my take on that.

If you have a 2 horsepower car it will remain a 2 horse power care no matter if you put a friggin pine scented ... thingie in it.

It starts with getting motivated sellers and a lot of them!

Do PPC or facebook marketing, get your funds in place that corresponds to your favorite strategy, and I promise you, you will reach your goal as fast as humanly possible!

Now... a personal opinion...

There are FAR better ways for passive income than rental properties man. FAR better ways! Just an FYI!

I still say that if you want serious passive income... start a house flipping business. now that could EASILY give you over $200K/month flippig just 3 - 5 houses at a time!

How many houses do you need to get for an income of $200K/month through rentals?!

Exactly!

Stone Jin · Answer

@Cyrus Jones Try to save the 40-60K this year and when everything goes on sale next year you will be in a good position to capitalize.  With no experience and no money, you will have a hard time getting loans whether traditional or non traditional.  You can try to partner with local investors and learn the craft first.  There are guys in Phoenix that will show you the ropes if you partner with them.  Best of luck!

Stephen Brown · Answer

This is great insight. Thank you for sharing!

Ian Walsh · Answer

Protect the money first and make money second.  The speed of acquisition should be under this idea and not above it.

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