How to Buy 5 Rental Properties in Just 5 Years

Dave:
This is how to buy five rental properties in just five years. Landing five rentals in five years can change your entire life and your financial future. But getting five properties within a short time span, it can be daunting, especially with housing prices as high as they are. But this is absolutely still possible. And today I’m going to share with you three strategies you can use to buy one rental every year for the next five years and set yourself up on a course for financial freedom. Hey everyone, it’s Dave. Welcome to the podcast. On the show we often hear people say things like 10 rentals in 10 years or getting five properties in just the first few years of an investing career. And of course this all sounds great, but the the obvious question is how do they actually go about doing this? Because for many, getting one deal is understandably a challenge.
In addition, even if you land one, you often use your savings and then the question becomes how do you get that second property or the third property, let alone your fifth in just five years? It becomes a real challenge. There are absolutely ways to do it many ways in fact, but there are three time tested approaches to scaling and many of those in our audience can use to get firmly on the path to financial freedom in just the next five years. In today’s episode, we’re going to hit ’em one by one. First up is what is probably the most conventional classic approach to getting five properties in five years, and this is an owner occupied house hack and I’m going to explain to everyone why house hacking is a really good way to do this, but I know it’s not for everyone. So we have two other strategies that are not owner occupied strategies that I’m going to share with you after this.
So again, we’re talking about house hack first. If you’ve never heard this term, it’s basically just an owner occupied rental property strategy. And there’s two different ways that you can do it. You can buy a single family home, live in one of the bedrooms and then rent out the other bedrooms to roommates or other tenants. Or traditionally you buy either a two, three, or four unit small multifamily property live in one unit and rent out the other ones. And I specifically say 2, 3, 4 units because that qualifies as residential property. That means you can get a traditional mortgage on it. You can put in many cases as little as 3.5% down. And so this is a great way to get started for one of the reasons I just said. You can put less money down, but there are other really good reasons why house hacking is such a good way to get started and scale to those five properties in your first five years.
Like I said, you put that list money down, you also can just learn a ton from it, but it also opens you up to a lot more deals because cashflow when you are house hacking isn’t as high of a priority. Now don’t get me wrong, if you are going to house hack, if you’re going to spend all your time and your money on an investment like this, it absolutely needs to improve your financial position. That should go without saying, but whether or not you’re actually generating positive cashflow every month isn’t that important. When I house hacked, this is how I did it. I wasn’t cash flowing, but I reduced what I would’ve been paying to rent to very close to nothing, and that really improves your financial position and it allows you to save more money that you can use a year from now in order to buy that second property.
So those are just some of the great benefits of house hacking. But if you’re curious, why does this work? Well, like I said, the low down payment, that one goes without saying, but the other reason is that when you get these loans that allow you to put as little as 3.5 or maybe you put 5% down, you have to owner or occupy. That is the rule. You need to live in that property, but you only need to live in that property for one year. That is the only requirement. So after a year of successfully house hacking, saving some money, maybe earning some positive cashflow, but either way saving a lot on your living expenses so you can put more money away, then one year later you can move out and you can apply for a new owner occupied loan. So again, on that next property, you can put as little as 3.5% down and you could just keep doing this year after year.
That’s why so many different investors start with this strategy of house hacking and hopping from one house hack to another over five or maybe even longer years doing one per year. To help sort of explain this and hammer this point home, let’s just talk quickly about an example here. So say you buy, let’s call it a duplex for $300,000, and I know some people might think, oh yeah, you can’t buy a duplex for 300 grand. Do not tell me that is impossible. I have done it recently. It is absolutely possible to still buy duplexes for that price. Maybe you live in an expensive city, but there are absolutely places that you can do this. So as an example, we’re going to say we buy a duplex for 300 grand. We’re going to put, let’s call it the minimum 3.5% down $10,500 that you’re going to need for a down payment.
Plus you’re going to need closing costs for sure, and you’re going to need some cash reserve. So let’s estimate that we need something like $17,000 in cash to close on this deal. And it is important to note that if you are going to put three and a 5% down that you’re going to get lower cashflow. But if the numbers work, do it. If you are in a position where you can put 10% down or even 20% down, I usually recommend people do that because that’s going to lower your overall interest costs. You’re not going to be paying PMI, which is private mortgage insurance and you’re going to have a better cashflow or better financial savings if you put some more money down. So if you can do that, you may want to, but in this example, you can have as little as $17,000, which is of course nothing to sneeze at, but if you’re talking about buying real estate only needing $17,000 to buy, that is a pretty incredible deal, especially because in this scenario you are buying two units at once, so that’s the money you’re going to need to put into it.
And then let’s just say that each side of this duplex that you’re theoretically buying rents out for 1500 bucks. That means that you’re going to have $3,000 a month in total rent potential and your payment on the mortgage that you would need putting 3.5% down would come to 2250. And let’s assume that you are going to need to put in, let’s call it two 50 a month on top of that in additional expenses. So total expenses would come out to about 2,500. So if you’re doing this scenario where you live in one side and you rent out the other, this would come out to you paying $1,000 per month in living expenses. Now, that might not sound like a lot, but let’s assume that you were previously renting a very similar apartment that would cost you 1500 bucks, right? We just said to rent this apartment costs 1500 bucks, and so by doing this house hack, you are saving $500 per month in living expenses, which equates to $6,000 per year.
That’s about 40% right there just from your living expense savings of what you need to buy that next property. And if you’re already saving money each month, hopefully you are because you need to be. If you want to be financially free and to invest, that’s just kind of how it works. Then this will really, really help you get into that next property. You’re already getting 500 bucks a month in savings that’s going to get you $6,000 a year. So you need about 800 bucks a month more in savings per month. That is probably easier for couples to do, right, especially if you have two incomes. So that’s how a lot of investors approach getting their first house hack. And then you could just basically repeat this every single year. The other approach that you may want to consider is let’s just say each side has duplex has three bedrooms.
You rent out one unit completely, but in the unit you live in, maybe you find roommates and you rent out two of those bedrooms. This is a more common approach for single and younger investors, and I know this isn’t for everyone, but I really genuinely have seen a lot lot of investors do this approach and it really works. It is a very powerful financial move if you’re willing to live with roommates. And I should mention, actually, we have another episode coming out on Monday with Miller McSwain who’s going to talk about a co-living model. So if you’re interested in doing this, make sure to check out the episode coming out Monday. But let’s just go back to our example here. So if each side of duplex has three bedrooms, maybe you are going to be able to rent each bedroom out for 500 bucks, right?
We were saying it’s 1500 bucks. So you divide that by three, you are going to pull in a total of $2,500 in rent, right? $1,500 from the side that you completely rent out, and then a thousand bucks from the two bedrooms that you are not living in. Remember we said our expenses were 2,500 bucks a month, so now you are living essentially for free, and that should hopefully allow you to save up enough money to buy that next property one year after you close on your first house hack. And this is just one example. Some house hacks actually might be even more profitable and more beneficial to your financial situation than what I’m laying out here. Some might not work as well of course, but I’m just trying to show you how this would work for your first one. And then again, the whole thing we’re talking about here is how do you scale that up?
Well, after one year, you’re going to qualify for another FHA loan. You could put as little as 3.5% down. Again, you rent out the unit or the bedroom that you are living in. You get a new property hopefully around the same price, and obviously you’re going to need to save up some money in that time, but you can just rinse and repeat this for five years. You can do it for 10 years if you want to. This is just something that you can scale and it really works. I can’t even tell you how many people who have come on the show have done something just like this. So if this is appealing to you, definitely something to think about. Now I get that this approach isn’t going to work for everyone. Not everyone wants to move every year. That’s totally fine. It might delay financial freedom a little bit for you. This is a very powerful approach, but I get that not everyone wants to do this. It’s more for that really motivated group that wants to accelerate financial freedom as quickly as possible. But if that doesn’t describe you and you want a less lifestyle impactful way of scaling up to five properties in five years, there are definitely ways that you can do it. I’m going to share my second strategy with you when we come back from this quick break.
Welcome back to the BiggerPockets podcast. I’m here talking about how you can get five units in five years before the break. We went with a time-tested approach of house hacking once per year, taking advantage of that residential financing that allows you to put very low money down and can scale every single year, but there are other options, non-owner occupied options. Two more that we’re going to share with you today. The next one is a very popular strategy, but it’s popular for a reason. It is called the Burr method. If you listen to the show a lot, you’ve definitely heard me talk about this. You’ve heard a lot of people on the show talk about the BRR method, but if you aren’t familiar, BRR is an acronym. It stands for by rehab, rent, refinance, and Repeat. So basically what that means is doing the bur method is sort of like doing a flip, but you actually keep the property.
So you buy a property that is not up to its highest and best use. There is a lot of room for value add. There is room for improvement. So you’ve got to find one of those juicy deals that’s going to allow you to really drive up the value through a renovation. Remember, that’s the first R, so buy was one first. R is renovation. So you need to be able to increase the value of that property considerably through renovation. That’s kind of why it’s like a flip, but then instead of selling the house, you rent it out. So you start generating income and then you refinance it because selling is one way to get the equity out of your deal once you’ve done value add. But refinancing a property is also a great way that you can pull equity out of a deal once you’ve done a value add project and driven up the property value of the project that you’re working on.
So this is a great strategy for anyone, whether you’re trying to scale, you’re trying to do your first deal, whatever. It’s a really good strategy because it combines a lot of the things I personally love about real estate investing. It allows you to generate rent and passive income. It allows you to get big equity boosts by doing a renovation. You still get all the tax benefits of doing value add unlike flipping. And so there’s a lot of really effective strategies at play here just within the Burr method. And you might hear people say, Burr is dead. I think that’s super silly. I see people doing it successfully all the time. I’ll explain in a minute why some people are saying that and why I don’t believe that. But even if you’ve heard that, just bear with me for a minute because bur absolutely still works and can help you get five deals in five years for sure.
Let’s just go to an example to help explain this. So let’s just say we’re going into a cheap market and we’re going to buy it for $250,000 and I’m saying two 50 because remember, this is a property that’s going to need a rehab. It’s not going to be rent ready, it’s not going to be in perfect shape. We need to get it up to our highest and best use, let’s say because we are not going to be living in this place, we’re going to put 20% down, that’s 50 K, and then you’re going to need another 50 K to renovate. So that comes out to a hundred thousand dollars that you’re going to need for this deal, and you definitely could do it cheaper. Like if you want to combine this with the house hack and do an owner occupied, awesome. That is an even better way to do this.
You can partner for this too, because not everyone has a hundred thousand dollars just laying around, but for this example, we’re just going to assume that you take all of this on yourself. I should also mention there’s ways to borrow the 50 K for a renovation, whether that’s hard money or a 2 0 3 K loan. All of these things are possible just but for the simplicity of our example here, I don’t want to make it too complicated. We’re just going to say that you have a hundred grand and you’re putting that into this $50,000 renovation. So let’s say you put in this 50 K to renovate the property that boosts your value of your property up to let’s call it 350 grand. That would be a great return, totally doable return. By the way, this isn’t some pie in the sky number that is a doable return on a burr, and then you want to refinance it because driven up the value of this property, but you have all this equity sitting in there.
So yeah, you want to hold onto this property, but you need to extract some of the value that you’ve created to go on and buy your next property. So the way you do a refinance on something like this is you get a new mortgage, right? You had that conventional mortgage, but you have to get a new one. That’s what a refinance is. And on this new mortgage, you got to keep 20% in, that’s going to be 70 K, and then you need to pay off your original mortgage, right? You had that first loan and you’re going to need to put in 200 K. So that comes out to a total of $270,000, but your property is worth 350. So that means you can actually take out $80,000 on this deal. So you put in a hundred K, remember 50 K for the down payment, 50 K for the renovation, but now you can recycle $80,000 of that.
This isn’t what is known as a perfect burr, and that’s why people say that burr is dead. A lot of people assume that if you’re doing a burr, you need to be able to extract 100% of the money that you put in after you refinance, and that’s great If you can do that, that’s amazing, but it’s not that common. There were some years in real estate where it was possible, but even if you can extract 50% of your value, that’s amazing. That means that you can really scale up how quickly you can acquire new properties because you don’t have all the money that you saved up sitting in that first property, you’re taking some of it out and applying it to the next deal. So maybe you do this and you have 80 grand to go invest. Maybe you buy a single family residence, maybe you are able to save up a little bit more money while you’re doing the bur just from your normal W2 job and you buy a next property with 80 k plus a little bit more.
Maybe you do the exact same thing over and over again. Maybe you find a partner. The point is, this strategy of Burr allows you to keep recycling a lot of your capital so that you can realistically buy a deal every single year for the first five years of your investing career. And hopefully you see how this works because of course, this is just a very, very simple example, but it is an amazing way to build wealth to scale and build a portfolio. And there are some trade-offs here because you do need to be more hands-on than just doing sort of the turnkey type of house hack that I was talking about before because that was just kind of moving in, renting things out, and that’s great. You have to do the value add here. Doing a burr takes work. You have to figure out how to do a successful renovation.
So if you are just getting started, I do recommend starting with a real cosmetic rehab. I only did cosmetic rehabs for the first, I don’t even know, 12 years of my investing career. So you could go a long way just doing these types of simpler renovations. And if you’re just getting started, I really recommend you start there. And then if you want to scale up to those more complex renovations, more risk, higher opportunity for returns though for sure if you want to take that on. So this is our second option. Our first one was house hacking owner-occupied strategy. Second option here is the Burr strategy. We’re going to talk about our third option for buying five properties in five years right after this break.
Welcome to the BiggerPockets podcast. We’re here talking about how you can scale to five properties in just five years. The first two of the three strategies that I’m going to be sharing today were house hacking and the bur method. Option three here is pretty simple, be rich. And I know that’s a little bit ridiculous. I’m kind of joking, but you actually don’t need to be that rich. I’m sort of just talking about people who have access to income or savings. So if you make 150 grand a year as a household, you can very realistically just go out and use that income to buy a rental property every year, or maybe you aren’t able to save that much, but over the course of 10 or 20 years of your life, maybe you and a partner have been able to save a couple hundred grand, then you realistically can go out and buy properties every single year as well.
I think this is important for people to take into account because if you think about, okay, I want to go buy five properties in five years, a lot of people might assume that you need a million dollars to go do that, or you need $2 million to do that. And that’s not really the case, right? Let’s just say you have access to $250,000 lying around. Maybe that’s in a self-directed IRA. Maybe it’s just in a savings account. Maybe it’s in bonds or the stock market, whatever. It’s if you had 250 K, you could realistically go out and buy a nice pretty turnkey single family home in the Midwest every year for the next five years just by putting 20, 25% down. That is a very realistic way to achieve five properties in five years. And I really like this approach if you’re in this beneficial sort of favorable financial position, because it kind of allows you to do the dollar cost averaging approach where you just kind of put it, set it and forget it.
I buy one single family rental every single year. I’m going to do that until I’m financially free. I talk to people on this podcast all the time that do that. You could do that if you have savings. I should also say a lot of people who have excess income every year could do this as well. So whether you’re single or operating in a household with a partner and dual incomes, if you can save 40, $50,000 a year, you can apply that to real estate and buy it every year. And again, I know not everyone can do that. That is not the most common solution. But I do think it’s worth mentioning that this is possible because there’s sort of this spectrum in real estate investing where some of the most beneficial, most profitable options just take more time. They take a little bit more hustle.
You see that with the house hack, which doesn’t have to be hard, but you have to move every year, which really is what two annoying days of your life every year. I think it’s worth it. Or a burr where you have to take on a value add project, which is time. Those are great ways of earning returns. But for some people who have a decent amount of money, you might not want to do that hustling. Maybe your life is comfortable and you want to just go buy a single family home every year. That’s absolutely still a great option for anyone who can afford that. So those are our three options. Again, there, house hacking burr and just have access to income or savings. But I should also mention that these three different approaches don’t have to be treated independently and differently. You can actually combine these together, right?
You can house hack with a birth. That is absolutely something that you can do. You can partner with a friend who has some capital to go out and do the rich person approach of just buying turnkey single family rentals every single year. You can get creative. These things don’t exist in a vacuum. You can absolutely adjust them to suit your individual preferences, your risk tolerance, your needs, your financial situation, absolutely can get creative. This is really honestly how real estate works. I think a lot of new folks think that, okay, I need to own a hundred percent of a deal, or maybe I’ll just hustle into this first deal and then once I get that first deal, I’ll just be able to buy property super easily after that. That’s not really what happens for almost everyone I know, even really experienced investors, people are always partnering.
They’re always coming up with creative ways to use financing to recycle their capital to scale at an appropriate pace for them. And so I encourage you guys to do that. These are three really good foundations that you can use to buy five properties in five years, but if they don’t feel exactly right to you, that’s fine. You can just use some of the other tactics and approaches that we talk about on this show all the time to tailor it to your specific situation. Alright, hopefully this was helpful. That’s what I got for you guys today. These are three great ways to give you some ideas to get to five properties in five years. If you have any questions about this, feel free to hit me up. If you’re watching it on YouTube in the comments or if you’re listening to this on audio, you can always find me on biggerpockets.com or on Instagram where I’m at the data deli. Thank you all so much for listening. We’ll see you next time.