All Forum Posts by: Account Closed

Hey guys & gals,

I'm going to invest in a 6-unit complex all cash. This is my first adventure into real estate rentals. My goal is to run it myself for a year, and cash out re-finance after I get a track record.

The numbers work ~ 500k sell price, 5 out of 6 rented at 950/m each.

1) it's 6 units x 1bed/1bath - is there a pitfall with 1bed/1bath units?

2) I want to buy in cash and hold into an LLC for protection. Will this harm my ability to refinance down the road?

3) It's an older product at 1940. Passes lead free, with recent renovations. Roof redone 2017

4) The units don't have laundry. There is room in the basement, but it would expose the guts (furnaces, meters, water tanks) of the house to tenants. <-- I think this is a pitfall I might be missing. Each unit is 550sqf. I am not sure there is room to add it into each unit. What is a way to solve this?

5) Some more expensive apartment complexes were built this year adding a lot of product to the market. These are higher end units at 1700/m+. A lot of them have been added into the market. This could be another potential pitfall.

6) Pristine A+ location.

Basically what I'm asking is: what are some things/traps I should be mindful of before investing.

The numbers work out.

Thank you for your time and knowledge. I appreciate you.

Daniel

1 Vote

Originally posted by Monica Breckenridge:

Dan B. There is a lot you can do with you money. I guess it would depend on what your goals are. Is your goal to set yourself up financially for the rest of your life and retire early or is your goal to make as much extra cash as possible right now. When I started out in real estate I was only focused on the cash, because I had none. I was 25 and just got out of college.

I didn't start investing in rentals until I went to a Schaub class on Building Wealth One House At A Time last year. That man really inspired me. I was never in a position to retire before because I was doing fix and flips and making lots of money but it wasn't setting me up for retirement. So maybe what you can do is about 1 fix and flip a month. Get a hard money lender to lend in 1st position and then use your cash to for the fix up money. You can make an extra $240k a year doing this if you can find deals that profit $20k per flip. This is my minimum requirement.

with the additional money you can buy up rental properties. You can either buy subject 2 the existing loan or you can find a good deal and get a loan on it. I have a strategy I have been doing since last year on buying a house and then refinancing with zero money out of pocket. I have a blog on that as well.

http://www.biggerpockets.com/blogs/2849/blog_posts/21931-how-to-buy-a-house-with-zero-money-down-getting-a-loan

Monica, my main concern with the house flipping route is the ability to scale up quickly. If I am trading my time for a quick lump sum payout - it's not really the kind of income I'm trying to earn. The other thing that's keeping me from doing that, is I'll definitely make more on one internet project vs. one house flip project in the same amount of time.

If seed capital was an issue for me, I think house flipping would be a great route. But since I can scale up my current online business as high as I want to get really all the seed capital I'll need.

Thanks!
Dan

0 Votes

Originally posted by J Scott:

Originally posted by Dan B.:

@Dennis Fassett & J Scott

I was thinking of going that route, SFH, however, one experience I've had with my online business makes me think this is not the route I want to go.

Basically, in my online business I create "internet real estate". You have two routes you can go: make a crap ton of small websites vs. making 2-3 bigger websites. The advantage of going the "crap ton of small websites" route is a lower entry barrier, less risk, you get to learn the ropes, etc.

The disadvantage of going that route is when you try to scale it up. Once you have 10 or so websites, the burden of managing and caring for those websites gets greater and greater. Eventually you plateau because of this.

I want to be in a situation where scalability is not an issue.

What are your thoughts on that?

Unfortunately, I don't think comparing online "properties" to real estate is a good analogy (and I have experience with both -- I used to be in management at Microsoft and eBay and I now rehab houses and do some other investing).

The big difference is that it's common to make near infinite returns online. The cost of starting a site is often minimal, and every dollar of incremental income is a large fraction of your start-up costs. It's easy to bootstrap large sites by starting small and rolling your profits into infrastructure, inventory and employees.

In physical real estate, there is a large startup cost -- either you're paying cash for property (in which case you're spending a lot of money), leveraging heavily (in which case you're servicing a large debt) or somewhere in between. The returns on real estate are rarely close to infinite, and in the cases where they are, you're either exposing yourself to a good bit of risk (high amounts of leverage) or you're spending an exorbitant amount of time working (no-money down deals).

Sure, there are economies of scale in larger buildings and commercial, but you need to be able to afford entry into those deals, and $160K -- and more importantly, little experience -- is probably not enough to enter that market. Remember, if you're planning to be a passive investor, the larger the property, the less it will (generally) generate in ROI. Typically, larger commercial properties are generating between 6-10%, which is much less than a single family landlord can produce.

Now, if you want to become an active investor and make LOTS of money, that's certainly possible. But, that's going to require a lot of experience. Investors making 8- and 9-figures are developers who:

1. Have lots of vision
2. Have access to lots of capital (debt, equity or both)
3. Have the ability to execute (this is needed for #2)

It takes a good bit of time in this industry to gain any/all of those things. So, if you really want to build a business that large, you need to start smaller, build up your experience and learn the industry. You don't necessarily need to do that with SFH, but you will need to do that with smaller projects than what you seem to want to tackle.

The other option -- if you want to put your business skills to use -- is to use real estate as inventory as opposed to investment, and to create a business around buying, selling, and financing real estate without much focus on the development or investment side of things. For example, there are guys on here doing turn-key rental properties, buying/selling notes, lending, etc, who are probably making 7-figures, but they probably wouldn't call themselves "investors" first-and-foremost, they'd consider themselves entrepreneurs who use real estate as their choice of product.

Just my $.02...

Great info! Thanks J Scott - you clearly have an idea what you are doing.

I 100% agree with you that I need to start with a smaller project first - I've been thinking a 4-7 unit apartment complex will be a good start for me.

Time to do my due-diligence!

0 Votes

Originally posted by Michael X:

Dan,
I’ll elaborate a bit more on those two points.

Point #3
These are observations from my dealings with small local banks.

Banks will want to see lots of cash flow and they like to see assets. Owning properties that are paid off will show that you are fiscally responsible. You have to remember that the majority of small businesses don't survive. You need to show that you have staying power and understand the business. This makes them feel better about offering credit lines and making future loans. They will be eager to help you out once they see a record of success. They are not into gambling. Normally banks like to see that your business has been in operation for at least one year. Two years is even better. Therefore, if you really want to get into real estate then you will want to start your LLC as soon as possible. That starts the clock.

Point #4
Let's say you have 10 properties paid off. If you are buying REO houses and doing well with your purchases you will be picking them up under 100k and renting them high. The issue is that all of your cash flow will have little shielding from taxes. Sure your cash flow is only taxed at 15% capital gains but you can do better. At 10 houses I would expand out and purchase a BIG property that would give you plenty of tax benefits. This shields all of your income from the 10 paid off properties and gives you additional cash flow. You would milk this property for the cash flow and never pay it off. You will just end up refinancing when the balloon comes due in 5 or 10 years. This "resets" your tax shield. Like any property the first 10 years are the most beneficial when it comes to tax benefits. This is because you are paying the majority of interest during that time period. Also, that's why you will see a lot of investors swapping properties at about 10 years.

Hope this helps,
Michael

Michael, THANKS! Those are huge tips you gave me. Much appreciated :)

0 Votes

Originally posted by Dennis Fassett:

Golly Dan thank you so much for writing it out in crayon for me like that! I see only now that what I've been doing, in focusing on ROI, has been thoroughly misguided all of these years.

To think that all of this time I should have been trading lower ROI for your definition of scalability. Silly me!

Hey Dennis, I'm sorry that you took offense to my question - I was merely trying to figure out if there was some kind of scalability issue with going the SFH route. From the business experience I've had in the past, I've learned that the more of something you have, the harder it becomes to manage later on.

What I was asking was at what point after having XX amount of SFH, does your ability to adequately manage your properties diminish over time.

If that's the case, I think I'd rather sacrifice a higher ROI on SFH in exchange for larger numbers but lower ROI on an apartment complex.

Am I totally off base with that?

Thanks :)
Dan

0 Votes

AWESOME! You guys ROCK. This is exactly the kind of responses I was looking for. Thanks so much!

@Paul Morgan - My online business requires only about 2-3 hours per day of my time, but that isn't really why I'm looking into this biz. I'm feeling REALLY uneasy about the US dollar right now. Since my business is all online, the only real assets I have are cash commodities, and stocks. I need something REAL, that even if the US dollar completely tanks, I still have something to fall back on.

I don't own my own home, and your suggestion about getting a multi-unit building is what I have been thinking of doing. Thanks for the input by the way!

@Michael X - EXCELLENT information right there dude. I really appreciate it. You touched on a lot of thoughts in my head:

In regards to point #3, what do you mean exactly by that? Are you suggesting that I buy a property in cash to build up some kind of perception of value from a lenders prospective?

And point #4, "Then you go after a bigger property that acts solely as cash flow and a tax shelter. Say maybe a 1-5 million dollar property which you never pay off." - can you elaborate on this more? This sounds like a golden nugget of info to me...

@Dennis Fassett & J Scott

I was thinking of going that route, SFH, however, one experience I've had with my online business makes me think this is not the route I want to go.

I want to be in a situation where scalability is not an issue.

What are your thoughts on that?

@Joel Owens

I don't think I'm trying to go the flip houses route. I have a good bit of seed capital to work from, the ROI on time invested on flipping one house vs. me just building another successful web property won't be worth the effort to me.

-------------

I think it's important I make something clear I didn't say in my original post.

My goal isn't just to have a comfortable living the rest of my life. I am trying to build this into a 8 figure a year business. That's why I'm thinking the SFH model won't quite get me to where I want to go.

0 Votes

Hey guys - my first post on BP, and absolutely thrilled to be here seeing how everyone seems pretty knowledgeable about building wealth. Was wondering your opinions...

Right now I have roughly $160,000 in expendable cash sitting in my bank account - all tax clear money I earned through my online businesses. I'm still pretty young at 25, so there's no reason not to take risk with my money since I have a lifetime ahead of me to recover.

My goal is ambitious. I want residual monthly income, and a ton of it. I want to be free of the matrix forever.

If you were in my position (I have absolutely no experience with real estate at all - I know what you guys are thinking right now haha!) how would you dive into the market given the available cash leverage I have?

My business still does a solid $250k a year in profit, so I have additional sources of income that might appeal to investors.

I think the problem will be credit history: I've never taken out a car loan or house mortgage, but have had credit cards since 18 and have been paying them on time with no outstanding debt.

Now guys, believe me, I know this is not just a cash and grab over-night riches thing. I realize like any business opportunity, you have to treat it as that: a business. I do all my due diligence before I enter into ANY business.

With that said, I think you can see here I don't want to move slow. I want to get into this market while prices are low now - and build enough leverage early on - without biting off more than I can chew.

From what I've learned so far, here's what I think might work well for me:

Start out in my local Baltimore market, tackling one market at a time to keep my business streamlined and organized.

1) Put down 30% on one complex priced at $300k.
2) Run that complex for a month or two on my own until I get a general idea of what the hell I'm getting myself into.
3) Hire property management company to take over my management responsibility of the property.
4) Replicate, rinse-repeat?

After you have say 3-4 properties, how does the overall workload of the business owner increase if it's all being handled through property management companies?

What do you guys think? I guess what I'm asking is how do you think I can take advantage of the advantage I have, without getting myself into too much too fast?

Thanks guys!
Dan

0 Votes

All Forum Posts by: Account Closed

Account Closed has started 8 posts and replied 38 times.

Post: 6-Unit Apartment Complex. My first investment. What pitfalls?

Post: 6-Unit Apartment Complex. My first investment. What pitfalls?

Post: If you had $160k in cash, how would you enter the market?

Post: If you had $160k in cash, how would you enter the market?

Post: If you had $160k in cash, how would you enter the market?

Post: If you had $160k in cash, how would you enter the market?

Post: If you had $160k in cash, how would you enter the market?

Post: If you had $160k in cash, how would you enter the market?