All Forum Posts by: Lucas Mills

Yes, this is exactly what I was getting at.

So, what are your numbers based on? Did you schedule out all of the CapEx items over the years to see how much you should be setting aside each month to prepare for them? Are your numbers based on something like that?

Hypothetically speaking, let's say you have 30 properties and 100k cash reserves. Over time, you draw from the reserves to pay for CapEx items, but you're also continually refilling your reserves with the monthly income from your properties. However, if your expenses are greater than your cash flow, then, eventually, your cash reserves will deplete unless you are contributing to them in some other way.

Ultimately, I don't want to have to contribute to my cash reserves forever. So how does one avoid running out of cash reserves? Do people just assume they'll have additional sources of income to help cover expenses until perhaps their properties are paid off and suddenly they have much more cash flow available? Are people counting on increasing rent over the years to help cover expenses, betting that the difference in rent will beat inflation and the cost of expenses?

I'm just trying to wrap my head around the long-term play, or how someone truly "retires", with rental property, and doesn't have to worry about working a second job to help cover expenses. How do you truly set yourself up for that? What if in the next 5-7 years when I have 30 some rental properties, I want to hand them all to property management and retire. What should I have done to make sure that I, personally, don't have to contribute another cent to my portfolio to help cover expenses, either in the short or long term?

@Account Closed

Thank you very much sir. I will do my own searching first then I may reach out for clarification if necessary.

Yes, the lease option (as opposed to just a buy and hold) sound like it has many advantages. I am wondering if I would have to continually be looking for new properties (assuming some of mine will sell), and how to eventually break out of that cycle or transition into something else. I.e., what would be a natural progression from this model.

I would like to be at the point where I am "financially free" and not needing to seek out additional properties within the next 5-7 years. That's not to say that I would quit altogether by any means. I just want my investments to reflect that goal so that it can be realized if desired. Doing a bunch of lease options sounds great for many reasons, but it also sounds a bit less "long-term", if we assume that at least some of them will sell. I don't really want to have to worry about that after 5-7 years or so.

Perhaps my question will be answered as I look into this more. Any more insight you have to offer is greatly appreciated! Thanks again for the help.

@Mike Dymski - Thanks. I'm starting to wonder if my local area isn't actually that great for buy and hold with respect to long-term performance and self-sustainability of properties.

@Account Closed - A couple questions:

1. Can you explain the "subject to" part? Is this where I take over the mortgage and make their payments? How does this work?

2. When you say sell to tenant buyers, are you talking about lease option? I know a local investor who does this - a 2-year lease option which means he gets a down payment up front (although we don't call it that), and isn't responsible for repairs. Sounds nice, except..

3. What if the tenant decided to not repair the roof/HVAC/etc? Also, I know that the majority of lease options don't end in sale, but let's assume they did. How do I break the cycle of having to continually find new properties so I can rest on my laurels at some point and let the properties take care of themselves, financially speaking?

Recently, I've been experiencing some confusion as it relates to cash flow, expenses, and the concept of self-sustaining properties.

At some indeterminate point in the future, I want to have replaced my monthly w2 income with that of rental property income. Simultaneously, I don't want to have to worry about working a second job (such as wholesaling) to replenish my cash reserves as I use them over the months/years to pay for capital expenditures and other expenses.

So, first of all, how should I approach this when analyzing properties? Do I essentially need to depreciate the CapEx items for each property I analyzed and figure out how much I will need on a monthly basis to allow the property to sustain itself?

When I ask local investors about expenses, I get mixed responses. One guy, who has about 16-17 rental properties over the course of the past few years, said that if you're getting $200 above the principal and interest, you're doing well. He said he takes out about 10% for vacancy and 10% for repairs/CapEx (20% variable expenses total) -- he seems to be ignoring property management as well as being too low on repairs/CapEx. If he's going to combine them, I'd think he'd want that number to be at least 15%.

Anyways, I'm just trying to figure out exactly how to go about analyzing properties so that I purchased properties which can truly be self-sustaining with regards to all expenses, while providing $150 - $200 in cash flow on top of that. Hypothetically speaking, I'd like to have 30 properties that can sustain themselves without needing to ever contribute any additional money to help pay for expenses. Is this viable? And if so, how do I prepare for this?

@Odie Ayaga @Dave Van Horn

Thanks for the replies. Great advice all around.

I think I'll stick with hard real estate (BRRRR) for now, for a couple reasons:

1. It's  what I'm most knowledgeable in at this point in time

2. A person who I consider to be a mentor to me is using the BRRRR method successfully, so it may behoove me to stick with learning BRRRR for now

Looking for a copy of this book, preferably in good condition without writing

I'm going through the BP podcast and the topic of notes just came up, and I'm somewhat intrigued. I have so many questions (such as, conceptually speaking, how they even work), but I think the most important question I have is as follows:

Should I even be thinking about notes at this point in time?

Right now, I have about 30k in the bank. I've been saving up with the intention to use that money for a BRRRR, and then to do it all over again with the same chunk of money until I have x amount of rental units.

To me, the BRRRR strategy seems very attractive because it allows me to quickly build a portfolio of cash-flowing rental properties (using the same chunk of money over and over again).

But, investing in a note sounds attractive because of the great returns. But if I spend 50k on a note, is there any way to "cash out" and do it again, or something analogous to the BRRRR strategy which would allow me to scale quickly with that initial 50k? Or do I have to save up another 50k from ground zero in order to purchase another note?

Perhaps what I'm really wanting to know is if my strategy of pursuing BRRRR is the best use of my capital at this point in time. The guy on the podcast I'm listening to almost seemed to preach against the cash flow mentality of BP, saying that young people should be more concerned with building capital and less concerned with cash flow. But are the two so mutually exclusive?

@Chris Mason

Please forgive my ignorance; I'm still learning all of these things and these concepts are very new to me. So, as I understand it, I can approach BRRRR in a few different ways:

1. Get up-front financing from a friend, family member, or other private individual who wants to be my investor. I pay for the property and rehab with cash. After rehab, I go to the bank and refinance into either a conventional loan or a portfolio loan. 

If conventional, I MUST wait 6 months after the rehab(?) (or appraisal?) before the bank will loan on the ARV (referred to as seasoning?). The loan will be fixed rate for 30 years, and in my name (unable to put into LLC).

If portfolio, the seasoning period is up to the bank and may be as immediate as upon completion of the rehab/appraisal. It will be a variable rate and a 20-year loan (most likely), but able to put into an LLC.

2. Get up-front financing from a hard money loan. The hard money lender should lend me the full amount I need to purchase the property and do the rehab. When it's time for the refinance, do I refinance with the hard money company, or can I go to my local bank and refinance the same as number 1?

Do I have it about right? Also, don't we as investors pretty much have to utilize portfolio loans if either:

1. we use all 10 of our conventional loans or

2. we want to put our properties into an LLC

?

@Greg Scott

Hi Greg - I'm a little confused. In your first example, you say that the hard money loan is then refinanced into a conventional loan. Then in number 3, you say to not go with a conventional loan. You seem to indicate that portfolio loans are a bad thing.

So then if I don't use portfolio loans, how am I supposed to scale my acquisition of properties to any appreciable degree? As I understand it, I can only have 10 conventional loans, and they all have to be in my name. So, what do I do once I reach all 10, or what do I do if I don't want to use any conventional loans because I want to put them in LLCs? Aren't I then pretty much forced to utilize portfolio loans?

I talked to a potential lender at a local bank today and was asking about the process of refinancing. He is familiar with the BRRRR strategy and works with investors who use it frequently.

As such, I was asking him about what happens when you go to refinance and, generally speaking, how that process works. He told me that the bank typically will refinance 80% of the appraisal value (although I know you should perform analysis with 70% to be conservative), however, he made it sound like, at best, I would be getting my money back and no more.

In other words, let's assume the following:

property: $30,000

rehab: $10,000

interest rate for private investor: 6%

interest after 4 months (on loan of 40k): $2,400 (by the way, is this usually just a flat $40,000 x 0.06 regardless of the time period, or is it 4 months x ($40,000 x 0.06) for a total of $9,600? I guess it can work however you want, but I'm wondering what would be typical in this scenario)

total owed to investor: $42,400

appraisal post rehab: $60,000

80% of appraisal: $48,000

So according to the BRRRR strategy, the bank should finance me $48,000 and I pay my investor back $42,400 while either using the $5,600 to invest into another property, or keeping it in the current property to build some equity.

However, the lender I was speaking with made it sound like he would not give me a loan for more than I was into the property (because that puts the bank at greater risk?). But - isn't that what the BRRRR strategy is all about? Creating a profit in this way? Or is it such that, the lender shouldn't know how much I'm into the property? Do I not have to tell him? What if he asks?