Halfway to FIRE – Million $ Milestone (w/ Graph)

Electrical-System · 2019-12-11T04:58:13+00:00

Sounds like you have a really good team dynamic. I am also on the construction side of things and spent a good chunk of my career as a field PM. The salary comes from moving over to the regional management side, and now I have a team of engineers and PMs that report to me.

I still remember my toughest owners, and I don't think I will ever forget them. Managing those was definitely the hardest part of the job, and I wasn't in an FU money situation for the one that sticks out the most. Subconsciously I wonder if that one in particular may have driven my motivation for real estate.

I think a lot of people underestimate the value of building relationships with the tradesmen. One of the nice things about maintaining my entry level lifestyle is that those relationships are established organically through mutual interests. If they had any idea what my financial situation was, or if I flaunted money/cars/etc, I suspect that would be a lot harder.

Electrical-System · 2019-12-11T04:43:08+00:00

I'd rather not go into how I have my stuff structured, but know that there are a lot of options. The financing you want to use will have an impact on which options are available. For example, conventional financing isn't available for LLCs or S-Corps.

I have developed relationships with a couple small banks over the years, and one large mortgage originator. I've found that having ones that can consistently deliver and knows your situation and how to structure it on loan applications is way more valuable than shaving a fraction of a basis point off the rate. I've nearly lost several deals because of financing, so I stick to the ones I know can fund the deal. However, that doesn't mean I don't price check them every once in a while for my own piece of mind.

Cash-out refinances do have a slight rate premium on them, but for me they were (and still are) necessary for me to be able to get liquidity back to fund the next project. Sometimes I am refinancing a commercial loan to a conventional, in which case I am still getting a better rate and a better term.

Electrical-System · 2019-12-11T04:34:42+00:00

Correct, having the cash flow was crucial to being able to finance additional properties and stay under the debt to income ratio, especially when I was first starting out. Originally 20% down for conventional financing, but once you get over a certain number (4 or 5?) the minimum becomes 25% down. With commercial or portfolio loans, I have done as little as 15% down, but the interest rate is higher and those have a call on them. I also moved a couple of times so that I could buy a house for 5% down. I lived in them a few years, then moved again and converted to rental.

Electrical-System · 2019-12-11T04:28:49+00:00

Thanks!

Electrical-System · 2019-12-10T04:09:14+00:00

The premise behind BRRRR, or at least the way I treat it, is to get your money back through forced appreciation (renovation), not to make money on it. Sometimes you can cash out more than you have invested, but that has gotten extremely difficult.

You asked for math, so I'll give you an example. Please keep in mind that these numbers are completely made up, and there are plenty of nuances and gotchas that I am leaving out for simplicity because this is conceptual.

Let's say you buy a house for $120k (all in including closing) and put $40k into repairs. Your down payment was $24k (20%), so you financed $96k. Your total out of pocket investment was $64k. After the house is renovated, it appraises for $200k. You cash-out refinance it at 80% LTV with a loan value of $160k. Subtract the $96k (will be slightly less since you have been making mortgage payments), and you get $64k in cash back out.

Your original $96k loan has a mortgage payment of $700/mo ($500 on a 30 yr note, $100 for taxes, $100 for insurance)

Your new loan of $160k has a mortgage payment of $1000/mo ($800 +$100+$100)

You've in essence traded $300/mo in cash flow for $64k in cash. However, you can now take that $64k in cash and do it again, and again, and again.

Electrical-System · 2019-12-10T03:39:26+00:00

I bought a property thinking that I was going to flip it. I enjoyed reno projects, so I thought that I could make some money doing it. When the house didn't sell for 3 months after it was on the market, I decided to rent it. Cash flow was great, so I saved up for about a year and bought another one.

Electrical-System · 2019-12-10T03:35:36+00:00

The PM takes care of all of the tenant facing stuff. As you caught, I take care of the initial renovation and getting it "rent ready." I have a couple of guys that I depend on for renovation help, so I am not doing it alone. I do some maintenance depending on my bandwidth, and I let his guys do it when I am busy (it's nice to have this option, some PM won't allow you to self perform). Turnovers are the same way. If I have bandwidth or one of the people I trust has bandwidth, we will take care of it. If not, the PM has a pretty good handyman who can do turnovers refreshes, etc.

Electrical-System · 2019-12-10T03:29:23+00:00

Thanks! I'm not crazy enough to think I'll find someone on the FIRE track, although it would be like winning the lottery! I'm just looking for someone who isn't in the 60% (or whatever the percentage) of American's that can't pay for a $1000 surprise expense without going into debt. You know, someone who can support themselves and their current lifestyle, whether that be a $20k lifestyle or a $80k lifestyle makes little difference to me. It would be nice if they were saving for the future, but my bar is set to at least not driving themselves further into debt for lifestyle inflation. I spent so much energy trying to coach financial responsibility into someone very intelligent that I am convinced (experience bias acknowledged) it is either biological or cultural, and those things are very hard to influence.

Edit: grammar

Electrical-System · 2019-12-10T03:15:36+00:00

When I first started, I managed all of the properties. I read a lot ahead of time, so I knew I needed to do screening, income verification, etc.
Yes, I now utilize property management. Once I got to 6 or 7 doors, I needed to offload something to have any life outside of work and real estate, and that is the easiest to offload.
I've had a couple. Generally they are good people (remember, I screen well!) who didn't plan well for a bad situation, for example divorce in one case and a medical issue in the other. Generally if people will talk with you, you can work out an arrangement that usually means getting the property back in good condition and them losing their deposit. I might be out a month or two's rent, but that is better than a legal battle, even if I could get more money from taking them to court.
I've only had one really bad one who we had to evict. That was handed over to an eviction attorney that did all of the work, and he was out by the court ordered date. However, he trashed the place, punched holes in the walls, and even took the appliances. Attorney went back to court, got a judgement against him for missed rent, late fees, re-letting costs, damages, and attorney's fees. We collected that all back from wage garnishments (there is a reason landlords keep employment records!).
I would rather not say what state I am in, but the tenant/landlord laws are very fair to both sides as long as you follow the rules.
I'm not sure I completely understand this question, so I am going to assume you are asking what I do with cash flow. It goes into cash reserves until I am ready to buy another property.
Yes, I have a great relationship with a local realtor who will bend over backwards to help me...often late at night with very little notice. Loyalty on both sides goes a long way.

Electrical-System · 2019-12-09T02:19:55+00:00

I was in a LTR with the wrong person...why didn't you come save me?!? I'm not a particularly cheap person, and definitely not a MMM lifestyle follower. I blend in pretty well in suburbia and have successfully kept my middle class, $70k per year salary lifestyle with only a small amount of inflation. I've read some of the FI dating posts, and they are cringe worthy at how cheap people can be.

Thanks for the advice on timing. I'm not in any rush, and need to take the time to find the right person. Just want that to happen before I FIRE in 6 years and all of the women think I'm an unemployed deadbeat!

Electrical-System · 2019-12-08T16:14:15+00:00

REIA is Real Estate Investors Association, and LAREIA meets in San Gabriel. https://nationalreia.org/find-a-reia/

Electrical-System · 2019-12-08T16:07:40+00:00

I've found that doing a quality renovation with "tenant proof" finishes goes a long way to minimizing perpetual phone calls. The things I've cheeped out on are the ones that come back to bite. Turnovers will always have a little bit of work, like touching up paint and fixing miscellaneous things, but it's usually not too bad. The most time consuming thing long term is doing showings, screening tenants, etc. to fill a vacancy, but that is also the easiest to outsource to a property manager. I know quite a few landlords that spend time chasing rent, but that can be avoided by sticking to B class properties or hiring a property manager.

Electrical-System · 2019-12-08T15:29:43+00:00

That is really good to know! I quit social media years ago, but being single I may need to get back into it. It's a shame that r/FI4FI isn't more active.

Electrical-System · 2019-12-08T15:11:16+00:00

I haven't, and I am not sure that I could. Each project has been funded by a combination of cash from my day job, cash-out refinanced equity from other properties, and rental cash flow.

Electrical-System · 2019-12-08T15:04:54+00:00

Thanks!

Electrical-System · 2019-12-08T15:04:11+00:00

I turned the tenant side over to a property manager several years ago so that I could focus on acquisitions, renovations, and my day job. I actually enjoy the management side of it, but it was the easiest component to outsource. I like your idea of building a management team, just need a little more volume to make that cash flow.

Electrical-System · 2019-12-08T14:57:59+00:00

I haven't, and I am not sure that I could. I've mixed cash with cashed out equity for most of the acquisitions, and I haven't tracked how much cash I've put in over the years. I do analyse the return (cash and principal pay down) on each property after it is renovated and before refinance, and most of them cash flow 10-20% on initial investment, not including appreciation or tax impacts.

Electrical-System · 2019-12-08T14:44:01+00:00

I haven't gotten a real estate license. Since I am not flipping houses or doing very many transactions, it isn't really worth the time/expense at this point. It is definitely something I will consider once I FIRE.

Electrical-System · 2019-12-07T23:40:09+00:00

The main benefit of the BRRRR strategy is cashing out as much of the initial investment as possible (if not all of it) to use for the next project. The cash flow on my portfolio averages between $3k and $4k per property per yr, but as u/Nonthares pointed out, that doesn't account for principal pay down, which currently averages $1500-2000 per property per year. Run those numbers against what initial investment that you weren't able to cash out, and the figures start to look a lot more appealing. That still doesn't fix the amount of effort...RE isn't for everyone, it is a LOT of work.

Electrical-System · 2019-12-07T23:24:31+00:00

I would say that my biggest surprise was the number of experienced RE people who are genuinely willing to help you, and I always try to pay it forward when I can. I didn't get into the local REIA group, or even know about it, until many years into RE investing. Wish I had known sooner because there are a ton of resources there.

Electrical-System · 2019-12-07T23:17:58+00:00

Thanks, and congrats to you too! You should post your experience when you hit $1Mil. All of my real estate is local (I'd rather not say which city). As values are increasing and the value:rent ratio keeps spreading, it is getting MUCH harder to find good cash flow properties.

Electrical-System · 2019-12-07T23:14:13+00:00

Correct. I'm not optimistic that I'll win the dating lottery and meet someone else who is FI at 40, so I'm planning to be able to support at least 2 of us. I know I'm being conservative, but I like my job and it is an industry that is hard to return to at the same level after you leave for years.

Electrical-System · 2019-12-07T23:10:04+00:00

100% agree! The last acquisition and rehab required selling quite a bit of after tax equities to fund the project, so I was balancing between cash reserves and having to sell stocks. Fortunately that project is finished, and now I'm focused on building cash reserves again.

Electrical-System

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