All Forum Posts by: Marcus Auerbach

I am not in favor of growing via cash-out refi. If you just borrow more money, you are getting deeper in debt. As you mentioned, you have to eventually pay it all back, with interest. There is a healthy amount of leverage, but the whole point of investing is to grow equity, and eventually a return on that equity. If you constantly cash-out refi you reduce equity and cash flow.

That's why I am trying so hard to make the point that you need a business that generates cash so you have money to in-vest on top of what your W2 is making. You don't need to buy a car dealership, it can be a side hustle or an online business.

If you try to get more rent than fair market, you will rent to desperate tenants, who got rejected everywhere else. We do the opposite. We do everything we can to attract the best tenants possible and have them stay for many years. That's why our rehabs look more like flips and we even finish basements as we target families with kids who want to get into the school district.

@Shiloh Lundahl I think you are hitting the nail on the head: these different strategies reflect our different personalities and personal preferences. 

I have stepped back again from full-time investing to part-time because I spend 60 hours a week working on my other venture. Because of that, my whole strategy is optimized to spend as little time as possible on REI at this point (all I do is buying and oversight, trying to stay out of the day-to-day as much as possible). Constantly trading properties would take to much time and mental energy, which I need for something else. That does not make one better than the other.

It's like the old sports car is better than pick-up truck - depends on what you want to do. Hauling a boat?

I think the key word here is "risk-adjusted" and if that makes you sleep better at night, then it may be worth it. Sure, the returns are lower, you could buy 4 properties instead of one with the same about of cash, so now you have 4 assets with 25% down in the race and accumulate equity (and hopefully a little cash flow). And you can argue about the actual risk of holding 30 year fixed-rate mortgages - it's pretty low, especially when you have adequate cash reserves. And you can also dial it in, put 50% down and leverage the other half, that is super conservative. But IMO the risk does not come from leverage. It comes from buying run-down assets in class D neighborhoods and having to rent to deadbeat tenants. That is risky!

The most important thing on your first deal is to keep the risk low. You do this buy buying a quality asset in a good enough location. And by not biting off more than you can chew for the rehab. A cosmetic rehab is still quite a challenge for the first time. Paint, carpet, light fixtures, maybe some doors, plus odds and ends - you'll learn a lot! Conventional financing will work for this just fine. Yes you will need a 6 months seasoning period, but by the time you got the work done, a tenant moved in - the 6 months will be almost over. HML is expensive, better to use private money from friends or family. Once you got the first deal under your belt, you can start thinking about the second.

I did alright on my first 3 rehabs, but got over-confident and #4 was a massive mess and turned out to be a money pit. I took on too much. I remember looking at the $60,000 bank account for the rehab at almost zero, still checks to write and still more work I had not even scheduled yet. I felt physically sick and had to go tell my wife.. The good thing is that rentals are very forgiving and I eventually recovered and years later it even started cashflowing. 

@Jay Hinrichs I remember one of your land deals: to this day that is one of the best real estate stories I have ever heard! 

From what I recall that deal was many years in the makings, besically there were almost different chapters to it, which new moves to adapt - you can't put that in a rinse and repeat formula. That was an applied master class. If anything it was a huge inspiration to me to keep my eyes open for these once-in-a-decade opportunities - and then have the patience and foresight to sit on it and pay maintenance for MANY years. In hindsight, it's so much easier to say: yeah I would have done that too!

Hi Ethan, I have been BRRRR-ing in Milwaukee for over a decade and after 2016-2018 or so I had to work increasingly harder to make deals work (much more complex rehabs: mold, foundation issues etc). Today our inventory is so low, that sellers don't have to give me 50% discount because of poor condition. They will find a first time home buyer that will be happy to pay close to what the neighbor's house (in great condition) is worth. If you can find one where you get the price to match the work needed, it is still one of the best strategies! But that's a big IF in 2025.

The approach that I take now is to let market appreciation and inflation do the heavy lifting for me. We have seen prices go up 8.2% in 2024 here and why would I work hard for half a year to do not that much better, if I can just do nothing instead?

Money, time and energy are interchangeable in real estate. If you don't have much money, but you do have time and energy, you can use that to find a unicorn deal that will still work with BRRRR.

Paul?

Same. 100%. Especially the properties we pick, the tenants we want to attract etc. I start looking at purchases today more as adding to my collection and "do I want to own this" has replaced "do the numbers work" as my first question to ask. (Still looking at the numbers, but it's now the second question). But it has not always been this way, I have had my low-income rentals and I am in a very fortunate position today that I can take this approach. But that's not how you can start out.

Hi Paul! I think I am just south of you?  Unpopular maybe, but for sure realistic and prudent. Buying quality assets that are in a desirable location and in good condition with a modest amount of leverage is IMO the only approach that I feel comfortable recommending. I have tried pretty much anything personally and I have seen so many investors start and either succeed or fail - well, let's call it abort and sell to never touch RE again.

And then I get calls from OOS investors who want to buy a 120k duplex in Milwaukee and when I try to tell them what will happen they go: uhm, I don't think we are a good fit. (Which is true, because I do mostly luxury residential, just trying to help)

Lease options are a great tool. I have not done one in ages, but they are a great alternative when it comes to liquidate SFRs and you have an open time frame. What I found is that more than half of the tenants don't execute the lease option and would rather stay and rent. Some investors will just not renew, keep the option money and find another tenant to do it again.

You have clearly exceeded critical mass, you buy above median assets. That's perfect! The question that I am trying to answer for new investors is where do you generate the capital to buy real estate in the year 2025. 

Starting by buying a cheap D-class rental and then hoping you somehow can leverage that into a portfolio will not work. You need an outside source of cash flow to fund the in-vesting.

Looks like Milwaukee made your list, even though quite a bit lower than Detroit. There is one thing to consider, you may call it "the magic of small numbers" when it comes to % gains

Milwaukee is also block by block and we actually have 19 municipalities and 4 surrounding counties, all of that is Milwaukee metro with 1.6m people. Most stats only capture Milwaukee propper (The City of) with is only 600k people and has a very different economic profile (concentrates most of the poverty & crime). So my first question is always about what's the geographic scope.

Anyhow, Milwaukee metro went up 8.2% in 2024, but when you break it down by community you quickly find that the highest % increases were municipalities with property values around 200k for a single family home, well into double digits. Higher-priced neighborhoods have seen slower % growth, mostly 4-8%. Everything over a million is barely keeping up with inflation. 

But that makes sense, otherwise, you'd see the hood go from 100k to 200k and the affluent areas double from 1 mill to 2 mill in the same time.