When to buy more property?

Question

I just bought my first rental, a single family home. I want to eventually own around 20 single family homes a 2-4 duplexes.. How do I know when it's time to buy my next property?

Timothy W. · Answer

Get your first one rented and cashflowing.  Give it a few months to build up a 6 months expense reserve, then go buy the second one.  Get it rented and cashflowing.  Don't buy too many too fast.  Your job is not to buy real estate.  Your job is to be a landlord.  You need to remember that you are the last person in line to make money in this business as a landlord.  The agents, loan officers, home inspectors, gurus, and even the tax man all make money when you buy.  You only make money when you make this sucker work as a rental (oh and the tax man makes money when you do that too).

The best investors I know had under a dozen the first 5-10 years of this then a couple hundred in the next 5-10 years.  Right now, do it slow and do it right and operate this one rental as if you are a person operating 20.  Don't let it get personal.

Edit:  I just read your reply a few posts up.  You seem to know what you're doing.  Really the best person to tell you how to run your business in the end is yourself and the licensed advisers you hire who have a fiduciary responsibility (aka their arse is on the line) to give you good advice.

Jason Kosowan · Answer

One other note:  When evaluating you for a loan, the banks like you to have reserves on each of your rentals, usually about 6 months worth.

So as you buy more rentals, make sure your reserves are in line.  You don't want to have every dime in the rentals - if a larger expense comes up, you'll want to be able to handle it.

Jeff S. · Answer

Adam Smith your personal income and assets have everything to do with the answer to your question. Can you afford, from your personal income to pay for a property without rental income? If you can then you should buy as many exceptional properties as you can afford with your personal income .

OTOH if you need the property to be rented to afford it then go slowly as you are at risk without much back-up. You are needing your business to be fully self supporting which requires cautious planning. Good luck.

Bryan Hancock · Answer

This is clearly investor dependent and the risk threshold depends on a number of things.  I don't purchase new property unless:

1.  My D/E ratio is 1 or lower
2.  I have more than 10% of my long-term debt in cash
3.  The property merits extending myself to purchase it.  This would require making at least 20% return on my equity using some financial models I have built

Ideally items 1 and 2 will still hold AFTER I purchase the property so that I can source property for longer windows.  Deals have a funny way of showing up when you're not liquid enough to take advantage of them.  So marginal deals using the criteria above may be passes if they'll put me in a position not to have items 1 and 2 above after the purchase.

I did not purchase any new product in 2012 because I'm currently working on item 1.  Early 2013 will probably be when I purchase my next buy-and-hold rental.  I am continuing to source new construction or rehab properties to get item 1 in order so that I can buy more long-term rentals.

Bill Gulley · Answer

Buy all day long when the market supports the property, when you have the ability to buy and the price is right. :)

Jilliene H. · Answer

Adam Smith I think it depends on a combination of your personal situation and the market.  If you can find single family homes that cash flow right now and have the financial ability to purchase more, now may be a great time!  Just know that it may be difficult to get bank financing for 20 single family homes and 2-4 duplexes.  You may need to rely on private money or another funding source.  Also keep in mind property management - are you doing this yourself?  Or hiring a property management company?  If you are doing it yourself, it's going to take considerable time moving from 1 property to 20+.  Personally, I am a passive investor so I never deal with property management.

Kyle J. · Answer

This is a hard question to answer because the right time varies for every investor based on a number of personal factors (i.e. your specific goals, available time, amount of capital available, etc). As a general rule, I agree that now is a good time to buy and acquire more properties while prices are relatively low.

The one word of caution I'd offer is not to grow faster than your reserves can keep up. You don't want to end up with a whole bunch of properties, and no money in the bank for a rainy day.

Jon Klaus · Answer

One reason flipping may be back is that it appears long term capital gains tax rates appear poised to increase from 15% to 23.8%. Short term rates will not increase nearly as much for most people.

Adam, BP's own Rich Weese has written a book where one chapter shows how to buy a house a year for 20 years.

http://www.amazon.com/From-Janitor-to-Multi-Millionaire-ebook/dp/B0070PNOLU

Scott W. · Answer

Buy a couple this year. Then 2-3 the next year. U will never see prices like this again. When everbody's getting out, that's when you get in. there's a reason warren buffet said he'd get into sfh rentals right now. There was an article revently of how corporations are getting in the rental biz.

I was in palm springs last week and picked up the la times. Front page was flippimg is back. We will see about that.

Account Closed · Answer

In my opinion there never is a bad time to buy as long as any property makes sense.

It makes sense if it meets your overall goals.
It makes sense if the property is a deal as defined by your goals.
It makes sense if you have adequate funding either from liquid assets and/or financing.

My business plan considers location, value add opportunities, cash flow, neighborhood demographics and bottom line how it will impact my future retirement goals.

What doesn't make sense is overreaching and putting all your assets at risk.  If you are buying to hold you need adequate reserves to cover eventual repairs and potential long term vacancies.  In my experience landlords eventually run into tenants that cause substantial damage and you have to plan for this as well.

When to buy more property?

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