All Forum Posts by: Lionel Li

You aren’t alone..

This is a long time debate about cashflow vs 100% cash-out, getting a discount at 75% of value and being able to float your 100% leverage in a BRRRR deal while breaking even in a B neighborhood is definitely a good thing. You didn't mention which market you're in but I'm assuming it's not in NJ since I've never heard of 5 digit prices unless it's in very rough areas.

The main thing that usually isn't discussed is reserves for the property + income you make aside from scheduled rent from this property. Can you still float if the furnace, roof, foundation went sideways? If you're in a decent neighborhood in that price point, you have ample reserves and/or income to weather any storm, I'd do this over and over until you hit your next roadblock. I've done it 5 times in the past two years and it's a plan. 

You will hear it from the anti-leverage group but they have a valid point for investors who don't consider the back-end discussion of liquidity and reserves. 

If the plan was to exit investments (stocks, real estate) high just to buy back (stocks, real estate), yes it's a little flawed. But, you've missed the big B word he mentioned. His business/practice has a lot of potential to grow faster than stocks or real estate. Sell equities and properties at the high point of the market (relative to the past 10 years) to funnel back into your business that has little to do with the market cycle spells exponential growth to me. This becomes best use of capital, and less of timing the market. 

Keep churning that active income machine and feed the passive wheel later as you go!

There aren't many assets that are safe from a creditor, even a 401k that's protected by ERISA can be siphoned from in different cases. Your primary residence is 100% up for grabs in a lawsuit if you have no other way of paying. Judgment creditors can force the sale of your home to get paid so please don't think your home is ever safe just because you live there. 

Personally, I'd go with the umbrella policy especially if asset protection is what the OP @Mathew Fuller is concerned about. Putting a househack property in a LLC is less than ideal in my case. Depending what state you're in the annual cost can be higher than an umbrella policy, you lose the Section 121 exclusion for whatever percentage of the home you live in because you no longer satisfy the ownership test, and the homestead exemption. Not to mention the logistic nightmare of maintaining and convincing the court you're splitting personal expenses from business.

Short answer: If you're losing sleep because you don't have asset protection get a umbrella policy or a trust for your beneficiaries. Any trust that includes the right protective provisions can lawsuit-proof the trust assets from a lot of these creditors.

Sort of in the same situation as you. I have (5) rentals and currently in the process of buying my primary. If I wasn't purchasing my primary I could definitely keep going to buy 3-5 more in the next 12 months. My method of acquisitions has been the Cash-BRRRR, you only need to save up for the purchase price of one property and theoretically you can recycle that cash over and over. I like this method because it's very versatile in terms of timing, stabilizing period for your cashflow, ability to scale and cash availability for other investments. Luckily my last (2) properties are still owned free and clear and haven't been BRRR'd yet (6 month seasoning), so there is equity to be tapped for cash-outs refi's without further increasing my DTI since the gross revenue will cover the expenses.

There's a few options if I was in your shoes: let my savings from W2 + Schedule E + C income build my fund, build more steams of income, buy deals at an even steeper discount, pull a 5 year 50k loan from my 401k to purchase and quickly pay the principal back if there's a deal I can't pass up and I'm missing some cash, last resort I'm selling my stocks from my taxable accounts or pulling my Roth IRA contribution balance (tax and penalty free). Not a big fan of commercial loans for residential investment properties but if you've exhausted all other methods, then that's the way to go.

Some of these methods could be more difficult for you to stomach but all roads lead to Rome.

I've seen a few SFR portfolios for sale however, they never seem to be the areas that I would really want to find deals in. Along with that, they always manage to sprinkle some rentals in really rough areas in there. I might've been okay with haggling the average price per rental for other units..but I look at those two or three dogs and I just don't want to go through with it. I'm waiting for the day I find a great or good portfolio from an investor that wants to 1031 into bigger deals but I know I'll have to act fast.

I still think the best market is where you find the team you're most comfortable working with. Everyone will tell you their market is the best market to invest in. There will always be a degree of bias because how many investors have actually tried all the cities in the U.S to accurately give you that opinion? You can also be in the "best" rental market with a great property but have a team that stresses you out because they're not; good at communication, cost effective, and constantly missing deadlines, etc. It stresses the importance of finding or building the right team for you. 

What I did was, choose my (5) top markets that I felt comfortable being in and pick the city based on the relationships and connections I made with the agents & brokers/PM's/contractors etc. Be upfront and let them know what you're looking for and your means of investing and if it works out, you're now building a long-term relationship with future business partners.

Good luck and enjoy the journey!

The biggest takeaway from this thread has been, how wrong I was about guessing the age of every person on BiggerPockets..wow, don't judge the member by his/her thumbnail!

I'm 29, started 2 years ago so it's hard to forecast the next decade(s) based on the small sample I have on myself. Not saying much but from a personal finance standpoint the last 2 years has been way more successful compared to the first 27 years. It's been a humbling short journey but I'm thankful for everything, even when you don't get what you expect. I'm hoping I have the energy to be growing and compounding my wealth as much as I have so far. Wishing many more decades of growth for everyone here.

You might've taken it out of context but allow me to help you explain:

Monthly Rent: $1000

Flat Fee: 10%/mo = $100

Lease Fee: 1 month's rent = $1000

Your total expense for PM is NOT 10%/mo. It's 18.33%/mo when you're looking at it for the year.

Now going back to your topic, it may be worth it for you but not to me nor the OP as it may appear. If your W-2 or your business generates more income or potential than your annual PM expenses and you justify spending the time being a property manager vs making more money..that's called a hobby. This isn't a 'one size fits all' kind of discussion, YMMV, ask yourself the (5) questions I've posted before and figure out the best path for yourself. 

A few questions I'd probably consider before figuring if property management costs are worth it: 

1. What kind of properties are you acquiring?
2. How much is your time worth (per hour basis) and how well is your construction business doing? 
3. Would you make more as a PM or a construction owner? 
4. How do you intend to self manage these properties? 
5. How many rentals do you plan to have? 

The last question was all I had to ask myself. It's usually worth the extra expense, but please build in the lease fee (25% - 100% of first month's rent) into your 12 month recurring fee. I find that a lot of people when calculating the PM fee only uses the flat rate 6%-12%. We chose a manager to run the rentals because we're treating this as a business..we should at least calculate the real cost like a business. 

I'd take the 3 out of the 5 grand and invest it in an index fund and get used to seeing progress of your assets growing and put some sort of automatic contributions to the fund. I'd then take the remaining 2 grand to invest it in myself to be a better agent (from your profile description) and to up the income you can make. 

Everyone starts from nothing, $5,000 isn't going to be life changing and automatically going to make you $100,000 by investing it but it's a good starting point to change habits and think of money in a different way. Once you've gotten a hang of that, then think bigger and put your money into larger assets. We walk before we run, trying to run first with no experience and you'll run yourself into the ground.