All Forum Posts by: Steven Loveless

@Cristina S. Sounds like you have some good clarity on what you want: 5-6 houses with "good" cash flow that you can pay off in a 10-15 year timeframe.

Now comes the fun part: What do those deals have to look like to get you there? I don't know what your yearly "investable" money is, but if you can afford a 20% down payment a year, 6 houses takes you 6 years. Then you need to look at what return you need per year to pay them all off in another 9 years to hit your 15yr payoff goal. Adjust based on starting capital and yearly capital allocation.

If that number comes out way more aggressive than you expected, then you need to look at maximum leverage, possible value adds, etc. If that number comes out lower than you expect, then you can adjust your strategy accordingly.

Leverage is simply a multiplier - both on the upside and the downside. If you are more risk tolerant, leverage higher. If you are less risk tolerant, leverage less - regardless of what some people say about cost of capital. The property and the leverage should be de-coupled completely. It sounds like you know what kind of property you are looking for, and you got some great feedback here on that property type. The financial strategy (leverage) needs to be purposeful and tailored to your situation, not some rule because someone on BP said cash purchases (or max leverage) are bad.

Best of luck to you! I know you'll get there.

@Cristina S. I'll add a wrinkle to the park money in a home vs. a REIT (or any other paper asset).

One thing you need to consider is your investment timeline, risk tolerance, and current asset diversification. If you already have a lot of money sitting in paper equity right now, then maybe parking money in a rental property isn't so horrible. It really depends on what you are trying to do and your personal situation.

A lot of professional investors (I see @Thomas S. chime in a lot on this) will make arguments about cost of equity and relative performance of RE investments vs. paper assets. He is correct in what he says - but he and other pros might not be you.

If you are in a position where you are trying to diversify and preserve capital - then sitting money in a property (even at a relatively low return) might actually be the best option for you. If you are trying to quickly build wealth/cash flow and have a high risk tolerance then you need those high return deals, using leverage to amplify your CoC.

Define exactly what you want from your investments - then go find an investment that achieves that. It sounds like you have decided on a particular type of asset w/o determining if that kind of deal is appropriate for YOUR needs.

@Patrick M. I'm not knocking Cozy or saying they do anything improperly or risky. In the link you sent to me they explicitly state that "we take responsibility for every dollar we process." Okay - so back to the point of the thread, how do I verify that? Does that mean they have insurance in case their partner (Stripe) commits fraud or has processing issues? Any significant delay in rent processing is potentially crippling for some folks. Does this come down to what Russell mentioned of sticking to the big players trusting that anyone that operates in the $1billion+ ballpark is inherently trustworthy? 

Straight to bank-bank ACH's is what I am settling on for now. Just curious as to other folks' thoughts on which third parties we don't vet well enough (and playing a bit of devil's advocate.)

@Russell Brazil I can't speak for everyone, but I can tell you why I used ERP in this particular case - they were the most affordable option for a provider that reports rent to credit bureaus. I have a cost-sensitive resident who is trying to build credit, so this is what we settled on. In hindsight, that was probably a bad move (hence the reason for the thread).

@Clay O. I think there were a more of us that barely missed the bullet than got hit - and there seems to be a lot that were impacted!

@Lily R. Property management software is another huge variable I have been pondering. Right now I don't feel I have quite a large enough portfolio to warrant dedicated software, but I hope to be there soon so am looking to scale. The biggest questions I now find myself wondering about them is based around the sustainability of their business model. Their software suite won't do me any good if they go out of business! I'm inclined to feel that whatever the "big boys" use would be the safest route here. I need to find out what the massive multi-family property managers use...

@Patrick M.I did see one message from someone @ Cozy, but I'm not sure it completely put my nerves at ease. I'm sure erentpayment would have come out with a similar message had the situation been reversed. My understanding of Cozy's response is they have a "better" third party partner, never personally take control of funds, and have more rigorous software & security protocols. I have not heard anything about what safeguards Cozy has put in place in case they or their third party partner suddenly have stability issues.

I'm not saying the sky is falling and we shouldn't trust anyone. The question remains open:

How do you vet third party partners and assess their counter-party risk? (And which ones should we be vetting more rigorously!)

Many of you probably know about (or worse have lost money with) the erentpayment.com SNAFU; I was lucky that I had payments processed right before this all happened. (Link for those that are interested: BP erentpayment.com thread)

I've come to a serious realization from this that I have overlooked a major component of my business. Most landlords go through hoops of due diligence vetting tenants, contractors, and the properties themselves. We have inspections, call in experts, run credit and background checks more in depth than most employers, and ask for references.

However, for the actual lifeblood of the business - cash flow- I found a website that looked pretty and offered some services that seemed to gel with what I needed at the time and signed up. I didn't consider the fact that pretty much anybody can pay to setup a pretty website with good functionality and contract with a third party payment processor. I didn't check their background, I didn't talk to the owner, I didn't check to see that they had insurance or fundamentally understand how they handled my resident's payments. Luckily it didn't bite me in the ***, but it easily could have. 

I completely ignored a concept of counter-party risk - something I am 100% familiar with analyzing in my paper investments, but didn't even really think about in my RE investments.

Now I have to search for a new method of payment and am asking myself the question - "what don't I know that I don't know"?

I'm struggling with these two questions, and would love input from some other folks on BP:

1. How do you vet your financial/legal/etc. third party partners?

and

2. What other counter-party risk am I completely ignoring in my business?

I had just started using erentpayment because I have a tenant that wanted rent reported to the credit bureaus. Luckily Oct rent was paid early (I know right!?!) so it cleared before these issues began.

 It seems there are fewer options that report; I may just have to switch back to a normal inter-bank ACH...

@Eric Lee I haven't done a BRRRR yet for various reasons, but the strategy can work in DFW just like it can anywhere. As I understand it the key to BRRRR is to find something that you can get the equity built into the deal. If you can't get the equity you can't do the "repeat" part of that - which is the entire reason that strategy works so well.

Best of luck to you - make something happen.

@Eric Lee as an investor that has gotten started in the last year and a half, I can tell you it's a tough road with the property types you are describing. If you are looking on MLS, expect to make a lot of offers that get passed over for all cash & favorable terms. If you are trying to use conventional financing expect that 30-45 day close time to hurt you. Even properties that need a lot of work are competitive.

If you stick with it though you'll eventually find something that will work. Just forget all of the rules you see on here, and run the numbers. Then run them again. If you got the numbers from a wholesaler, go run them four more times because they are probably wrong. Pay lots of attention to the major mechanicals - I would rather pay an extra $10k on the price (80% LTV finance) to not have to plop down an extra 5k in cash to fix a roof, AC, major plumbing, etc.

My opinion with the $150-200k range is that unless you are finding incredible deals (sourcing them yourself), the key to being cash flow positive is operational execution. A 15% discount on the purchase or $0 down financing doesn't do you any good if you hemorrhage cash because of a 1 month vacancy every year, high loss to lease, or lots of maintenance issues.

I'll just say this (as an engineer myself): I know a lot of high paid engineers who learned a lot about business/finance/management/etc. through personal development and on their own time. I have not met any business grads who learned the fundamentals of practical engineering on their own.

There is one thing that has been repeated over and over in this thread - the world always needs engineers, and pays them well - which you can use as a kickstarter for your REI endeavors.

If you absolutely hate engineering, you will find out very quickly in your coursework. In that case - don't do it. Otherwise there are great possibilities, as either an employee or eventually owning your own business. If you think you will ever branch out and consult for the general public, focus on getting your PE license!

 This doesn't sound at all familiar does it?

I'll post a different kind of failure: I started looking into rental properties back in 2012 when homes in DFW class A neighborhoods were cash-flowing (even with my conservative underwriting). I didn't think I could realistically save up a 20% DP in a short time period though (even though I have a pretty decent W-2); then life got in the way and I just never took the time to really educate myself and then get started. Fast forward 4.5 years, and those homes would be massively cash flowing and appreciated ~50%. Some failures come not from necessarily making the wrong decision, but from indecision and apathy.