Lower Your Risk – Buy More Properties!

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Today I met with a friend of mine who shared his experiences over the last 4 years with his only rental property. He purchased a property with no money down (when that was still possible) with the intention of renting it and collecting positive cash flow over the next several years. Unfortunately, he’s had a string of bad luck with tenants as well as unforeseen repairs, vacancy and maintenance.  While any savvy investor knows to budget for these types of expenses, there are just going to be those properties where you can throw those numbers out the window.

While it would be nice to try to point fingers at certain people or circumstances, sometimes a property just doesn’t pan out anywhere near the way you had planned for it to. As was the case with my friend, he’s been through 4 different tenants in 4 years with a fair amount of vacancy in between. As experienced investors will tell you, the more times you have to turn a house for a new tenant, the more expenses you rack up as a result of the mess the previous tenant left behind. Add to this a busted main water line, a roof leak, HVAC maintenance, vandalism, etc. it all starts to chip away at any return you may have hoped for (as well as your resolve to stay invested).

Welcome to real estate investing.  No matter how many rosy books you read or seminars you attend, there are always going to be challenges in your investing career.  Don’t get me wrong, I’m definitely not attempting to talk anybody out of real estate investing …. But I do think it’s important to educate folks on the risks associated with owning rental properties.

Spreading the Risk

The problem many folks run into when it comes to buying investment property is that the projections they had planned for on paper may not flesh out when there is only one property in the portfolio. Most investors have an expense factor that considers certain variables such as vacancy, maintenance, turnover, etc. Though, if you’re only 2 years into a single property, the chances of those projections being anywhere near reality are probably fairly slim. Why? Because, you simply don’t have a large enough data set to accurately predict those types of variables.

However, an investor that has owned 10 properties over the last 8 years probably has a much better chance of predicting and achieving the variable costs across his or her portfolio. When you own multiple properties, it’s much easier to absorb problem houses across the entire portfolio as there are going to be offsetting properties in the portfolio that perform at a much higher level than the others. When you measure the entire portfolio over several years, you begin to average out the vacancy, maintenance, and turnover variables. As you add new houses to the portfolio, it becomes much easier to achieve the yields you had planned on because it’s a lot less likely that one or two underperforming properties are going to drag down the overall performance.

Regardless, I know the frustration of starting out your investing career with an underperforming property. It’s difficult to want to buy more after feeling the pain of unmet expectations or even lost money. However, at the end of the day, investors that are making smart buying decisions have a much better chance of being successful when taking an approach that involves spreading the risk across multiple properties.

I’d be interested in hearing from some of you on this topic. How many investors started out with a difficult property but eventually acquired more properties that enabled your overall portfolio to perform as projected?

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About Author

Ken Corsini G+ is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He's been investing in real estate since 2005 with hundreds of real estate transactions.

10 Comments

  1. A HUGE problem I find with new investors is that they focus solely on finding and buying properties. Surprise! It only takes one property to make you a landlord.

    Toooooo many investors never study landlording and wonder why they have turnover issues.

    Just sayin.

    Thanks for the article.

  2. Ken,

    I tend to agree that more properties are easier to deal with than just 1 or 2 for many reasons you stated. Karen also makes a good point about learning to landlord.

    I think there are many reasons both of you are correct. Your story here could have easily been my first few years.

    As folks add more properties, they have little choice but to go from hobby mindset to business mindset. (or go broke) That business mindset forces many folks to tweak and fix those issues. Then there is economies of scale. Better discounts at stores and with PM’s, better systems to track and plug leaks, and as you stated big ticket items can be absorbed.

    By the time investors have picked up more properties, I think on average, their experience has grown substantially. Many learn exactly as Karen states, how to be better landlords. I can name few people who didn’t learn through the school of hard knocks. Either they burned out, or they got better at their job.

    Jason

  3. Ken, you’re absolutely right. Owning anything less than 5 cash flowing properties is begging for money short falls and lots of headaches. Even with five, three renters moved out the same week and I almost went bankrupt. Learned my lesson and bought a bunch more, there “is” safety in numbers. With good property managers, one is unlimited as to how many one can own and really spread the risk. Unlike most investors, I do 95% of the repairs keeping my cost waaay down and profits up.
    P.S. I buy properties from so-called investors who have no skills thinking their going to hit the big time. They get almost done and run out of money or had one or two rentals that were nothing but money pits.

    • Jim – thanks for the post – having the time and ability to make quick repairs can definitely help cut down on costs. And I agree with you 100% – mining for properties from investors that have burnt out can be a great source for new inventory.

  4. As a new investor I am looking at doing my first deal, how fast should I move from owning one property to owning two, three, four, etc? Should I do one deal and then immediately jump in again and find away to do a second? Or should I learn how to landlord for a few months then start hunting aggressively for the second deal?

    • Rachel – I wish I could answer that for you. While I do believe owning more properties can definitely help spread the risk, it can also increase your risk. As Jim mentioned above, he owned 5 properties and 3 went vacant at the same time and it almost sunk him.

      It is imperative to know your risk threshold before depleting cash reserves in an effort to acquire more properties. Most lenders want to see that you have at least 6 months cash reserves for every property you own …. I would say this is a fairly good benchmark.

      However, if you’ve got the reserves to do it and good coaching and/or property management, it doesn’t hurt to build up a portfolio quickly. Especially considering the direction prices are moving right now.

      • Thanks Ken! I think that is great advice and a 6 month reserve goal is a good metric to use to evaluate if I am ready to invest again, I hadn’t heard that but I am going to use it.

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