Quality Over Quantity: The Truth About Real Estate Goal Setting

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First and foremost, there are a lot of different types of real estate investors out there.

Different styles and different goals.

I myself am a “buy & hold” type of guy but I don’t look down on “house-flippers” because everyone has different goals and different needs. Additionally, everyone has different resources.  While I certainly don’t have any desire to flip houses, I do love listening and learning from successful flippers (like J Scott for instance) because more times than not, I usually learn something I can apply to my business.

Differences of Opinion

Recently, I was in Louisville, KY and had the honor of spending most of the day with Mike Butler.  Mike is the author of Landlording on Autopilot.  If you haven’t bought his book, go buy it now!

Mike managed 75 rental properties while working a full-time job as a police officer.  What’s even more impressive is that he did this in 4 hours a week.  I joked with him that he actually started the 4-hour workweek before Tim Ferris made it popular.

Mike’s book is my favorite book on real estate investing for two reasons.  The first reason is the granular details.  The book is filled with actionable advice.  He dedicates an entire chapter to the application process.

I will be the first to admit I was doing it completely wrong.  I had no idea how much more money I could make by simply changing some procedures in my rental business.

The second reason I loved Mike’s book and meeting with him in-person was: he is challenging.  If your looking for some fluffy book on how real estate is going to make you millions without any work, don’t buy this book.  Rather, Mike and I disagree on a big topic.  I love multifamily because of the cash-flow and Mike loves single-family because of the higher-quality renter you get.

Related: The 21 Best Books for Real Estate Investing

It was fun debating someone that was way more experienced than me.  Why?  Because I will be the first to admit I have a ton to learn from a guy with as much experience as Mike Butler.

Mike has had some great success with single-family rentals because he focuses on high-quality properties where people want to live.  As a result, he has very long-term tenants which of-course produces great returns when you buy them at steep-discounts.

I’m not going to give you the nuts and bolts of all of our points, but I will tell you what we both agreed on: FOCUS ON QUALITY.

Why I Don’t Focus On Quantity

It doesn’t matter if you have 2 properties or 200 properties, if they aren’t profitable, they aren’t profitable!

Stop worrying about how many properties you have and start thinking about how to maximize the revenue with the properties you do have.  For instance, Mike gets over 110% of his monthly rent every month.  You’ll have to read his book to figure out how.

This all bring me to my point about the worst real estate goal I have ever heard of, it’s this: To Own 100 Rental Properties.

Why is this the worst goal ever?  Because it doesn’t focus on profit at all.  Again, who cares how many you own, how profitable are they?

RelatedHow to Be a Terrible Cash Flow Investor (7 Guidelines for Ultimate Failure!)

As someone who has financed thousands of rental properties I know plenty of people with over 100 rental properties that would gladly trade that with 20 highly-profitable and highly desirable rentals.

If you are going to have a goal this year or for the next five years have a free-cash-flow goal.  Such as I want to have $10,000 in monthly free cash flow in the next 3 years.  Then work backwards and figure out how many profitable rentals you are going to need to get there.

Note, I’m talking about free-cash-flow to you personally after you have made your debt payments, insurance, taxes and any maintenance expenses.

By the way, focusing on this metric is how most lenders are going to analyze you personally and your business.

In summary, I want you take away two main points:

1. Focus on Quality over Quantity

2. Focus on Profit not the number of doors you have

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About Author

Jimmy Moncrief is a bank underwriter and real estate investor. He blogs at RealEstateFinanceHQ.com where he talks about all things real estate. He also is the creater of free evernote templates for BiggerPockets members to learn how to better organize and automate their real estate investing.

17 Comments

  1. Jeremy Baker on

    Great piece Jimmy! I just picked up Mike’s book to read during a trip we are taking this week. As beginning investors, my wife and I constantly fight the urge to just start buying properties even if they don’t quite meet our criteria. Maybe we are a little “strict” with our numbers, but like you mentioned, we want to be profitable.

    Here in the Denver metro, it’s harder to find great deals, so the temptation is to just snatch up properties that may not give you the best chance of positive cash flow or very little cash flow just to have some properties under our belts.

    Great tip at the end re: lenders. We’ve spoken with our lender several times and know exactly what they look for when lending on and refinancing properties. We did this after listening to your podcast a while back and we now don’t look at our lender as some guy we have to beg for money, but rather another resource to make sure we are getting a profitable investment.

    • Jeremy – great comment!

      I’m glad the podcast gave you some actionable advice that you are putting to work in your business. That was my goal!

  2. Quality tenants are even more important than quality properties, but you cannot get quality tenants without quality properties.

    I cash flow well over 10K a month. That’s after allowances of 5% for vacancy, 10% for maintenance and 7% for management. I manage them myself, and rarely have a vacancy, so that’s even better if I can keep it up.

    Your friend could not manage two tenants, if they were poor quality. If he had 100 units, and only two bad tenants, the two would consume 90% of his time.

    The real money is made re-positioning a rental from a lower quality to a higher quality unit. This can be done in a multifamily easier than a SFH, but it is possible. Find a rundown SFH in a solid area, and fix it up so you can get solid renters. Even if the rent is the same, profitability will be much higher.

    • Mike McKinzie on

      Good article. I have to admit that I have the goal to own 100 rental properties. But I have underlying parameters that make THAT goal a good goal. First parameter is that half of them must be Free and Clear. Second parameter is that my average rent must be over $1,000 a month per house. Which brings me to a number I keep in my records that I have never heard of in my reading. That number is, How much of my Gross Rents do I pay out in interest each month? Interest is nothing more than the ‘mark up’ on ‘buying’ money. Currently, I am paying about 17% of gross rents in interest. As long as I keep interest costs at or below 25% of gross rents, I am making good money. As a side note, 1/2 of that 17% is from just two houses that I am “trapped” with. But that is another story.

      • Sharon Tzib on

        I think the reason you’ve never heard of it in your reading, Mike, is because it is an irrelevant metric (at least in my opinion). As long as your cost of money exceeds your ROI, most investors will say that is a more important metric, especially considering mortgage interest is tax deductible anyway.

        • Mike McKinzie on

          Sharon
          You say that what percentage of Gross Rents is paid in interest is irrelevant!? Let me ask you this, “Is Interest an expense in real estate investing?” For me, it is every bit an expense as repairs, management, property taxes, insurance, HOA fees, etc… I don’t consider principle payments as an expense because all you are doing is trading equity positions. So if management is 8% of GR, property taxes are 10% of GR, Insurance is 3% of GR, why not add interest to that expense column? Sure interest is tax deductible, but so are ALL of the other expenses. Too many newbie investors ignore the aspect of interest, and all it’s consequences. For instance, a house may be a good investment at 4% and a bad investment at 8%. If we use the 50% rule, and I pay 17% of GR in interest, then I get 33% for PP&P, which is THE MOST IMPORTANT number of all, Principle Payment & PROFIT!!! I add Principle Payment because every month I take what would be PROFIT and add it to a Principle Payment, mainly on my 6% and 7% loans. Why? Because I can currently borrow at 4-5%. I agree that the ROI and ROI, (Return ON Investment and Return OF Investment) is the most important FINAL number, but what percentage of Gross Rents each expense is, is also important.

        • Sharon Tzib on

          Hey Mike! I didn’t mean to upset you. As I said, it is simply my opinion. If you can find cash flowing investments using your strategy, then all the power to you. But to answer your question, mortgage interest is not an operating expense like the other expenses are, and that is why you will never see it in a NOI calculation. Cap rates are always calculated before debt service because there’s just too many different ways to finance a property. You can control the interest % you are speaking of via how much you use as a down payment, but throwing cash at a property to make it cash flow is not always advisable. As long as I know I’m getting a favorable rate in today’s market that allows me to cash flow at an ROI that’s acceptable to me, and that said interest will be deducted anyway, it just doesn’t factor in for me. To each their own though. Not trying to start a war here :)

        • Mike McKinzie on

          If you only own five or ten properties, it isn’t as important, but when you start getting upwards to 5 digit and 6 digit monthly rents, I find it more important to watch out how much each expense is as a percentage of the gross. No, I was not offended nor starting a “war”, just saying that I am always looking at new ways to analyze investments. Leverage is always good, except when it is bad (how is that for being profound, LOL) The “cost” of money is just as important as the “cost” of a repair, that is all I am saying.

        • Sharon Tzib on

          Good to hear Mike – sometimes you can’t tell how people are taking your comments in the written word, so glad I’m not offending you :)

          Well now I understand your comment a little better, and I see where you are coming from in terms of managing this with a much larger portfolio. And yes, we can agree – the cost of money is certainly important. I can only aspire to have six figure rents — take care!

  3. Hey Jimmy! I can’t agree more about quality over quantity. I’m at a bit of a loss with regards to the SFR vs MFR comparison though. I don’t know what part of Louisville Mike invests in, but I’d be willing to bet that I attract much better tenants in my MFR properties than he gets in his SFRs. Type of property shouldn’t really matter. The best tenants want location and amenities and they’re willing to pay a premium for both. Some would prefer an SFR and some are fine with MFR’s…but the numbers are pretty great on MFRs if you know what to look for, so that’s where I’m keeping my money at least in Louisville!

    • Michael – that was exactly what the conversation was about! I couldn’t agree more!

      I can’t thank you enough for letting me stay at one of your places downtown. It was an awesome location and I know you are going put in some great amenities.

  4. Jordan Thibodeau on

    Great post. Reminds me of the 80/20 rule.

    A lot us (myself included) can get ourselves entrapped in the rapid growth mindset. It’s always nice to have an upper boundary on growth so you don’t over expand to purchasing sub standard properties.

  5. Jimmy, i am mot sure if this is in reference to my plan to purchase 100 homes. No worries if it is, but either way I think you have to look at the individual goal and not assume any goal that has a quantity in it is terrible. My goal is actually described by a 4,000 word, two part article describing my goal on my blog including why i made the goal, why i can achieve it and breaking down purchases and income each year. With that goals comes very specific buying and cash flow criteria.

    Just because someone says they want to buy 100 properties or doors, does not mean they also have specific criteria within that goal for what the properties have to cash flow.

    I will also add this goal has been a huge success already. It has taught me many new strategies for buying properties, renting, repairing and even motivated me to make more money and change my overall business. It has helped me buy more properties and pun myself to find more great cash flowing properties. It is also on one goal of many that I have.

  6. Sharon Tzib on

    I’m with Mark. I don’t think having a number is necessarily bad. If you know your free cash flow goal and you know what kind of cash flow you can get per property based on your niche/strategy, then sometimes it’s simpler to track your goal from a doors perspective than a dollar one. Whatever works to motivate you to me is the most important thing.

    Need to pick up that book though – sounds like a fascinating read. Thanks, Jimmy!

  7. Great points! I actually live in Southern Indiana and have gotten to know someone in the area that owns about 70 properties. My wife and I don’t have near that many, but anything we have we have picked up on the cheap, paid cash, made our repairs and moved someone in. All to say, my new buddy has told me that he’d prefer to own 20 that are paid for than 70 with mortgages.

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