All Forum Posts by: Travis Hawthorne

Thanks@Noah Chappell I'll take a look at Michael Blank and Sterling White. I think that's a good starting point is getting some feedback from people who went this route and what their experience was like. Additionally I'd love to hear from some investors that built up over and time can look back and assess how what skills transferred from starting with single family versus making the leap to small commercial.

@Paul Welden - agreed on reserves comment.

Some background on me: I am 36 years old. Work for a tech company in sales. I average $250K year in W-2 Income. Excluding retirement funds I have set aside $300K of investment capital to start. Education is degree in finance and accounting. Although I don't remember half of it but a few credits short from eligibility to sit for CPA exam as well.

I am gearing up to start executing my BRRRR strategy. Although I am a bit torn where to start. My goals are all about monthly cashflow and scaling fast. But of course I have to manage risk and not get in over my head.

Should I Begin with Single Family, duplex through quadplex, or Jump Straight into small commercial multi family(say 5-8 units)?

One reason I'm interested in small commercial multi is the valuation's make much more sense to me. I guess it comes from my Finance and Accounting background, but NOI, Cap Rates, it's all straight forward. Increase NOI and you increase the value of the property. The whole process of valuation for residential comps is unappealing, wishy washy, cumbersome, I could go on. Also I would much rather deal with other investors in the acquisition process than overly emotional financially distressed home owners when buying SFR. The idea of lowballing grandma because she has cancer and can't pay her bills on her SFR makes me sick. This seems like a drag. Sorry. This is all just perception by the way. Maybe i'm wrong.

However I have never done a deal, and if I started with residential could start with all cash offers with no partners or loans require for acquisition. Risk is relatively low (with respect to my available funds) and I can learn the rehab process. After a year or two even of that then I'll have even more cash (hopefully another $100k-$200k or more though savings) and can step up to the next level when I have more capital and more knowledge.

If I start with small commercial multi my research tells me I could likely get in the game (maybe not?) looking at 5-8 unit properties in south and midwest acquiring around $500-$600K (assuming they are able to be financed) if not I would need to find OPM or another source for enough capital for acquisition and rehab and stabilization.

I'm trying to figure out how much from what I learn doing single family and duplex etc will translate to small commercial multi and if there's a real benefit to doing that for a year or two before jumping into small commercial multi family. In theory it's lower risk, but in terms of process, maybe I'm naive, but it doesn't seem that much different. In fact due to the formulaic method of valuing commercial property it seems more straight forward to me personally. Also - what's another $100-$200K in capital going to do for me in a year if I want to get into small commercial? Sure It's an extra $100K, but still going to need to figure out how to do acquisition and rehab with additional capitol through partners, banks etc. I won't have a 1 million dollar bank roll next year or two. My fear is I waste a whole year fooling around with single family and in the end I learned more about rehabs, but haven't learned many of the skill's I really need to jump into small commercial multi family. My feeling is to learn how to do small multi family commercial just pursue that. 

Now all that said - I'm a newb, so what do I know. Am I a fool for trying to jump into small commercial with no experience and only $300K to work with? Maybe I'd find out pretty quick I just don't have the cash or experience to step into this arena yet or worse yet, go bankrupt and lose my cash savings.

Any thoughts from experienced R/E investors?

@John Leavelle - I know this is an old post - but may I ask why you run the 1% rule on the purchase price of the distressed property? And then again on the refinance? To me it seems that it's only material if it will cashflow after the refinance loan is taken out and the 1% screening criteria should be applied to the ARV, not the purchase price which will be a distressed and low amount.

Thanks@Daniel Zapata. That clarifies a bit for me. Sounds like it is optimistic to expect to get 100% of your money back on every BRRRR. Leaving a few grand in it isn't the worst I suppose.

@Israel Garavito - great insight. As an example let's say you are analyzing a duplex with a PITI of $1200 month for simplicity sake. In your model are you saying you would include $460-500 (230-250 door) for replacement reserves plus $600-1800 (1/2 to 1.5 month) which comes to a total of $1060-2300 in total reserves for the duplex during underwriting? The way you described it is how I personally view it - that reserves should be listed as an acquisition cost in the same way that we view property cost, rehab cost, purchase closing costs, (the list goes on). 

@Daniel Zapata - good point. If you just renovated then something major going wrong in the first 6-12 months seems unlikely. With your approach the result seems to be you're not spending your own cash on reserves and can keep it working for you in other capacities. However in my view that property isn't stabilized yet if there's no reserve fund. If to your point it takes 6 months to a year to do that so be it. I guess what I was hoping for so to speak is that disciplined inventors can find the right deal to ensure that on the refinance you actually get a little cash back above and beyond your cash outlay for acquisition to account for the reserve fund. I know that's possible, but not sure how realistic it is to make this a criteria on every deal. My worry is if that was a criteria than I wouldn't do many deals.

@Joel Calkins - thanks for your input. Agree 100% on allocating for capex and PITI in a general sense. Question is more about if you make it a standard in your deal criteria that on the refinance of your BRRRR you get cash back above and beyond your initial cash outlay to account for the reserves and truly recover 100% of your investment. Otherwise even if you do a "perfect" BRRRR and get 100% of your acquisition cost back, you still need to have a reserve fund which will be an additional cash outlay at some point. Sounds like @Daniel Zapata just let's that fund build in the first year through rent accumulation.

The main strategy behind BRRRR as I understand it is if done correctly you can recover your original investment with a refi and go do it again (repeat).

When you analyze a property do you include your reserve fund (for simplicity let's just say 6 months PITI) in your analysis when determining whether or not to buy a property using the BRRRR strategy?

If you don't - then to me you are setting your self up for spending that 6 month reserve out of pocket every time you buy a property. Let's say you do that 10 times in a year and the reserve is $6000.00 - it will cost $60K cash out of pocket in that year to do the BRRRR Strategy and have sufficient reserve for each property you purchased. So to me - i think i should factor in this expense and essentially underwrite it into my deals analysis.

However my concern is - does factoring this additional expense in make it unrealistic criteria and properties too difficult to find? Or should a prudent investor buckle down and do more work to find the right deal to meet his criteria? I think the answer is obvious that you should factor it in, but would love to hear from the BP Community.

The more I learn about R/E investing the adage "you make money on the purchase" seems to be more and more true. I haven't done a deal yet, but gearing up to.

Any thoughts are welcome. Thanks All.

Travis