In December 2021, I resigned from my full-time job at the City and cashed out my pension, to buy real estate (rentals). I wasn’t going to become a millionaire working in City government. I attempted a franchise business with roofing, but there were stringent requirements for the Arizona Registrar of Contractors for a qualifying party. So I took a contract job, making twice my previous salary on W2 in IT, after the initial roofing franchise start-up that didn’t work out due to the CR-42 trade exam, required for licensing.
With that knowledge of almost starting businesses, I began to learn about SBA 7(a) 25-year financing. The Rate is typically fixed for five years based on the WSJ Prime rate plus 2%. The Rate as of September 2022 would have been 7.50%. After five years, the rate re-adjusts to the prevailing WSJ Prime rate plus 2%, then by quarter.
I needed a lot of cash, so I started to pull out equity from my rentals. My premise was that if you start with just $100k in Cash-out or HELOCs reinvesting 100% Cash-on-cash (CoC) return with Alfa Equity Partners (a Private Equity I formed, for Assisted Living Facilities Acquisitions, established businesses with the underlying real estate) after more than 5 years you’re already a millionaire in Cash-flow: $100k from year 1 reinvested plus another $100k in returns in year 2 was $200k, then $200k in capital investments plus $200k in returns after year 3 was $400k by year 4, 4+4 year 5, 8+8 year 6 etc. This works up to the $3.5-5million limit for SBA 7(a). But of course, there are road-blocks, or setbacks while you learn how to do this, like I had with rentals for cash-flow, which were extremely slow, and made me try to pivot into businesses instead, with operations on top of real estate, for better cash-flow than rents.
For the first deal under contract, from the prior years’ tax returns of the business, the seller’s discretionary earnings were not enough to support the new debt, with an SBA 7(a) loan. Basically, the DSCR (Debt Service Coverage Ratio) was less that 1.0x but needed to be at least 1.15x (Income, divided by Expense including the Debt servicing or mortgage and business loan payment – which can be combined). For the second deal under contract, I later learned you need a Guarantor with experience, not just a licensed Manager – basically, if the manager were to quit, who’s going to run the business, the SBA lender wants guarantees, versus an operator with skin-in-the-game. My model for acquiring these businesses, was to be absentee-owned and run with staff, one Manager and two Caregivers, for a Residential Assisted Living (RAL) home of that size, with 8 beds or less.
How I got to these numbers was based on my deal-flow analysis, with only 10% down and leverage, and bringing the operations up to full capacity. In the first situation, the sellers were the operators and were running it, but not at full operating capacity. This will increase net income and cash-flow. For example, only 6 out of 8 beds had ALTCS (Arizona Long Term Care System) seniors, with some Private-Pay, while the seller was the manager/operator. That was in the Business Plan, to fill the two vacant beds, in a quick turnaround fashion. The Rent Roll for this business was $24k per month at 6 beds occupancy, or $4k per bed. Filling two more beds gets it to $32k/month, or over $300k in revenues. With an average profit margin of 30% that is $100k net income. The extra two beds at full-occupancy and paying the SBA loan and the new Manager, makes the net profit sufficient enough to be a high CoC return.
To calculate with the assumed Cash-on-cash return, that is 100% CoC, if I take $100k out in equity (HELOCs from rental, and primary residence which was offering 100% LTV), and invest with AlfaEquity.com making $100k/yr in year 1, based on my annual projections at full-capacity, then reinvest that new $100k cash-flow, you now have $200k, acquire another assisted living facility the following year, that would be making you $200k/yr in year 3 for the first two combined by end of your third year, all things being equal. Then you rinse and repeat for year 4 bringing in $400k, your first two plus two more like-acquisitions, then by year 5 you’re making $800k in net-income or cash-flow, and after the 6th year you are making over a million dollars every year in cash-flow.
I also looked at Wealth Accelerators – Trucking Automation, with SBA 7(a) financing 10% down, 10-year for equipment, towards cash-flow in absentee-owned trucking (assets/trucks here instead of real estate, but similarly with business operations). All this sounds good on paper, acquiring businesses for cash-flow. It won’t happen overnight, but if you quit it won’t happen at all.
Most SBA lenders also require secondary or additional collateral pledged from your rental portfolio to fully cover the loan. Since they are lending on both the business and real estate combined, with 10% down, the value of the real estate is mostly covered/secured, but they need assets to be posted for the business valuation. The property for the business will be the primary collateral at 85% LTV and 10% LTV for FF&E (Furniture, Fixtures, and Equipment). The secondary collateral, from your rentals at 85% LTV minus any mortgage liens existing, has to now cover the rest of the capital at risk from the lender. For the secondary collateral, the SBA lender takes a second lien behind the current first. Will try again soon, especially with SBA contacts, and lessons learned.