Why shouldn't I buy a hundred cheap SFH in a cashflow market?

21 Replies

I live in SF Bay Area, CA, and have a fancy tech job that I enjoy (at least I did before COVID). Have about $8k a month to invest in real estate after maxing retirement accounts thanks to high income and modest lifestyle as a single guy.

Started in real estate by buying a newish construction SFH in Bay Area last year for ~$625k at 5% down. Now have an amazing tenant in place (section 8) at $3,300/mo. About $50k of appreciation in 18 months, but rent only covers HOA, PMI, interest, taxes, and insurance - principal I pay out of pocket, and self manage. I bought this property as a hedge against the local market because I intend to stay in the Bay Area long term. Bought a duplex out of state for my mother - she covers the mortgage and all expenses while AirBnBing out the other side - I only bought it to subsidize her; pretend it doesn't exist. Have a bit over $100k in cash/index funds, and want to keep about that much as reserves since I'm prone to long hospitalizations due to chronic illness.

Over the least year I have 4 other out of state single family homes, in a small (but not tiny) midwest city which I deem to have a long term stable market (national average population growth, diverse stable economy, largest city for some distance, has both hospital and university, low crime). Total combined purchase price is $120k with $25k rehab resulting in about $80k of forced appreciation. Gross rent is $3,150/mo (average: $30k purchase, $6k rehab, $50k ARV, $785 rent). I own them all free and clear. (Double checked title and with tax assessor.) That's a 2.25% average gross monthly rental yield. If I scaled up my acquisitions to a bit over 1/month I would expect that ratio to drop closer to 1.8% (guesstimating), but I've also broken 3%. Everyone has paid on time in full this year so far. 

I found a mentor in the market who is done scaling his own portfolio (he refuses to take on debt, just rode the 2011+ wave, and his cashflow pays for his crazy frugal lifestyle more than 10 times over). He opened his team to me. So, I have an investor friendly real estate agent. And I have a property manager / rehabber who leads a crew that works for (what I consider to be) peanuts. They appear to do good work (and are itching for more work this year). I've met those 3 core players all in person and they all seem like genuine people I can trust who know what they're doing. I'm perceptive enough to be sure of my assessment of them.

By my nature I'm (reasonably?) cautious, but ambitious and extremely-numbers-oriented. (I could have been a quant.) Every signal I'm getting is telling me to go to a portfolio lender and scale in this market until I can't anymore. I've been avoiding further debt so far because of how highly leveraged I am on the Bay Area property. I also didn't want to give up the superior financing rate/terms with conforming loans, but I now realize that missing out on even one deal over their restrictions cancels out the benefits they offer. (Talk about shifting to an "abundance mindset"!!)

Why should I not just go full tilt and double and triple down on this market? I watched a BP podcast of a guy who scaled to 100 properties in 2 years, and I think I could do that in 2-4 years, so 100 single family homes has become my next goal. I understand that there is significant logistical and maintenance overhead with 100 SFH, but I also don't hear about people acquiring multifamily at >2% monthly rental yields. How bad would the problems with 100 single family homes really be? I feel like those problems are firmly "good problems to have". Should I be balancing learning how to do something else while exploiting this opportunity? My disposition is agreeable enough, but I am not a marketing or sales guy.

My goals are to reach $5k+/mo passive income ASAP, then safely maximize IRR until I decide to quit my day job, which will realistically be several years (or tomorrow if I win the lottery). I've identified a couple other markets that look similar to the one I'm active in, and could expand into if I built a team there. This makes me nervous, since I'm not sure I could actually replicate the shockingly-easy success I've had in this market. I feel like there are big parts of the learning process I've just lucked into skipping. Am I just suffering from imposter syndrome?

@Chris Parker

There is a lot here. I don't know, buy 5 more SFH in the market and see what happens? If you have good PM and have accounted for coming capex there is no reason you can't have 100 SFH. However, start with 5, then 10, etc. Maybe at 10 you'll have a reason you don't want more or you want to diversify out of this town, or whatever. Don't worry about the 100 houses worry about what to do to move your goals forward. If that's buying 5 more houses, great. Just be careful getting over-leveraged with a bunch of rehabs going on. If that's not issue, awesome, go for it. Seems like you've given it some thought!

If it works for you, then do it at a rate that works for you. But don't feel pressured to scale up or buy something that you aren't comfortable with. Make sure you have a healthy reserve as repairs seem to happen on multiple properties at the same time and with more properties, there will be more repairs. As Lee said, don't over leverage yourself.

@Chris Parker

The primary reason you shouldn’t buy 100 sfhs is it could be a giant pain and would end up being a full time job. Even with a Mgmt company and a trusted team, you will most likely spend a lot of time managing your team.

That being said you would be your own boss and you may find the work more rewarding.

There’s only one way to find out though.... good luck and congrats on your success thus far.

@Chris Parker , my thoughts are similar to @Daniel McNulty , the only reason NOT to buy 100 SFH with strong cash-flow is it's time consuming. You may find a breaking point around 30-40 where you cannot work your day job, or at least not be as effective.

You may also find other opportunities over your 2-4 year time horizon that move you off of your 100 SFH goal. As you continue to grow and network in one market, you may come across larger multi-family properties that catch your interest.

I'm going through a similar experience in a small county in Eastern Pennsylvania. The numbers are very similar to yours and I'm having a hard time buying in other markets because the numbers are very good. I'm up to 17 properties and 36 units. I'm leveraging property managers and a team to handle as much of the work and oversight as possible. My advice is keep it up as long as it continues to work! 

@Chris Parker this is fantastic I love the plan.  I recently read "the pumpkin Plan" and your idea strikes me as something along the lines of a "giant pumpkin" taken from the book.  It's specific, its niche, and it is repeatable and standard enough that you could build systems around it to scale it.  From a numbers point of view perhaps its worth establishing investment metrics, not only to purchase a property, or screen your leads in a way, but also as a performing asset.  If you are going to take this on you'll need to think about what does a successful SF rental look like as a performing investment for you, and then track each property based on those "success" metrics.  That way if at property number 50, you are finding that property number 15 that you bought really isn't performing that well, and you can adjust what you are doing there, or perhaps just sell it and take a small profit and run. 

Its one thing to "like the idea" of 100 single family rentals as a portfolio, and its another to successfully execute that portfolio, but you seem like a numbers person and I have no doubt that you'll just get more and more efficient the more of these you buy.  You'll develop relationships in the markets, and things will get easier and easier the more you buy...so it is a great strategy!  

Good luck!  

A time will come when the maintenance + capital repair costs will overwhelm you and your paper cash flow.  Do not underestimate what Midwestern winters can do to your inventory.  At $30K per home, you are also buying in C- or D neighborhoods.  Do not underestimate the costs associated with that strategy.    

Thank you everyone. I know it was kind of a silly post I just wanted a sanity check. I felt like things were turning out far too well for being so easy. Going from 0 to 7 units in a year was easy, and I just wanted to make sure that I wasn't missing some "oh everyone knows you don't buy properties like that" gotcha before I got aggressive with scaling. Seems like I'm not crazy, but I will definitely heed the advice. 

@Lee Ripma Oh wow, I was *just* watching your BP podcast episode. Good stuff! I forwarded it to a lady scientist friend of mine who is thinking about getting into REI. We've got some mutual friends with construction background and your strategy in LA was very intriguing; I made a note to dig around your website later.

I do intend to expand my reserves, and I think the leverage can actually help there. 

@Daniel McNulty Yes, I intend to buy myself out of a job. My expenses aren't that crazy, but I figure since I find REI fun I might as well aim high.

I know I'm still very green, so pardon the question, but how much of an exaggeration is "100 SFH is a full time job even with a trusted team"? I'm sure that it'll be very hectic during the acquisition phase (which is fine), but surely once things are stabilized the implied 35 minutes a month per property of my time is a bit high? 

At what point do you need to bring in someone to manage the managers for you? 

How much of a time difference on my side is there at an equivalent scale, but mostly in the multifamily space?

@Jon Kelly Glad to meet someone with similar numbers! 

I'd really like to know what you budget for expenses. My mentor there reports ~35% expenses, but he doesn't really track capex budgets or have insurance, etc, so I've just been using 50% as an estimate for the long term. My intuition is that these cheap houses should have a higher budget for expenses... but my mentor doesn't report that, so it's the variable I've been most worried about, especially in light of his totally unreasonable level of frugality.

That 30-40 unit breakpoint you mentioned is interesting, because that's ~10x my current scale, and I currently spend ~0 hours a month worrying about units after a tenant is in place... and 10 times 0 is 0. I fully believe what you're saying, but I'd like to know how that time breaks down because it's not obvious to me from where I am.

@Michael K Gallagher Thanks! I might have to check out that book. I know that I'm definitely still "liking the idea" but I just wanted some confirmation before I really started going after it instead of trying one of the other countless strategies. The "do the small simple thing which you know works, over and over" approach seemed to follow the KISS principle, and the numbers sure seemed good, so I started to question why I needed anything else. 

Oh, and don't worry, I am not lacking for metrics :) 

@Darius Ogloza Shockingly these are in decent enough neighborhoods. They're humble, working class, blue collar neighborhoods, but they're not actually that bad. Walking around at night alone isn't an issue. I'm going to leave the truly bad areas to other people, but I definitely understand your skepticism as I shared it.

I know the winters are unexpectedly destructive but you're right that I don't know how to gauge how big of a deal that is. 

When you say "paper" cashflow, you mean the expected amount I projected? What do you suggest for determining long term expenses in this type of strategy?

@Chris Parker

100 houses equals 100 roofs, 100 water heaters, 100 driveways, 100 yards, etc. My 2 pennies on the matter is that you may want to consider a Monopoly-like move and transition from green houses to red hotels (houses to apartments) down the line. In this instance you'd have less roofs and driveways to worry about while still having a large number of doors/units.

But at the rate you're going, keep pushing it as long as you feel comfortable and can stay on top of everything. 

@Chris Parker What Bob Okenwa said.  What I can add is that managing 15 units in and around Rochester NY meant a new water heater every four or five months, and a total of three roofs and two HVAC systems (one replacing an octopus from the 1880's) in about 5-7 years.  

By paper I meant projections.  

@Darius Ogloza Whereabouts in Rochester did you invest? Just curious because I’ve had multiple units here for 10 years and haven’t had a fraction of the issues you experienced. (Have never replaced a roof, have only replaced a couple water heaters, etc) 

@Chris Parker I would suggest starting with whatever $$ figure you would not mind losing totally....   so if that is 100k or 50k whatever, only start with what you can lose without it causing issues in your financial life.   Once you know the number, then you can test the waters......   But! I have read enough horror stories to know risks abound...  so my answer to"why not" is go for it, but use whatever funds you consider to be expendable. and learn and then see if you want to invest real money. 

also, as you can see most here have something to sell.... keep that in mind when they offer "help"

@Chad Ellis

Two duplexes in southwedge (Oakland Street and Cayuga Street)

Three duplexes in North Winton Village (2 on East Main at Winton and one on Marion)

 One triplex in Park Ave (Rutgers Street)

One SFR in Brighton

One SFR in Pittsford (still own it!)

100 single families are hard to manage. 100 SFHs have 100 roofs. & Most importantly, everything cash flows on a spreadsheet. Many don't in real life. Maintenance is a lot higher on 100 sfhs, usually mainly because it's just more square footage. 

Large SFH portfolios can be done, its just not as easy as people say it is and you need to buy them for CHEAP (which isn't easy to do in any decent market).

Sometimes, less is more. I'd rather own 10 rentals that net me $500/each per month and have quality tenants and less headache as the owner than to have 20 properties netting me $250/each per month.

That's my perspective.

@Chris Parker 50% is a safe estimate for expenses. It's highly dependent upon how far your go with the up-front rehab. I've tried to cut corners with the rehab and get burned by water damage from a leaking roof (safe to say I went over 50% expenses on that property...). Given the price point, my guess is you'll have "C" class tenants. Just like any others, you'll have good tenants and bad tenants. Bad tenants can eat through your 50% expense budget, while good tenants can keep you in the 20% range. 

Regarding the breaking point, I meant 30-40 properties (not units). And, the breaking point is just a wild guess because it's different for everybody. If you're actually spending ~0 hours on your 4 properties, then why would you stop at 100 properties? Go to 1,000 or 5,000. I have to imagine you'll start spending time managing your "team" and your finances. You spent ~0.5 hours writing these BP posts. How much time will you spend buying 100 properties: looking for properties, making offers, negotiating deals, walking your properties, refinancing properties, communicating with lenders, contractors, property managers, agents, networking, etc. 

@Chris Parker This looks like a great situation. From my pov, I suggest to prepare now to know a) what well-cash flowing and appreciating/depreciating property looks like to you so that you can cut losses early and b) how to screen for and handle employees, as the advantageous position that you have might risk draining you of your time if you accumulate property way faster than you delegate tasks. A BP show I watched talked some about virtual assistants and automation ( https://podcasts.apple.com/us/podcast/biggerpockets-real-estate-podcast/id594419649?i=1000459377933 around the 20:30 mark): If you’ve got things that you dislike spending time on now, they’re gonna take 20 times that once you’ve secured the goal!! Consider thinking of how to scale your operation downward as you continue to grow, so that if something happens market-wide and you have to stop in your tracks you won’t have to pay too much overhead (that said, you’ve got great reserves). Looking good.

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