Newbie trying to understand how to scale

[Jennah Sontag]

Let's say I purchase my first door with a conventional loan. Then to get my 2nd door, is it better to finance with another conventional loan or get a line of credit by borrowing off my first property (then get a line of credit from my 2nd door to put toward my 3rd door and repeat the cycle)? I don't understand the risks involved with either approach to know which is better. Thanks for any insights!

[Robin Simon]

Every situation is different but generally the best approach is likely getting standalone conventional loans for your first approximately 1-5 properties (assuming your DTI can qualify and the paperwork is not too burdensome). Around hitting the 5 property mark is when most people reach the "second stage" where you are trying to scale and its not as easy to qualify for DTI that most people switch to commercial "DSCR" loans or HELOCs etc.

[Ricardo Hidalgo]

Quote from @Jennah Sontag:

Let's say I purchase my first door with a conventional loan. Then to get my 2nd door, is it better to finance with another conventional loan or get a line of credit by borrowing off my first property (then get a line of credit from my 2nd door to put toward my 3rd door and repeat the cycle)? I don't understand the risks involved with either approach to know which is better. Thanks for any insights!

 I would consider increasing cash flow of your business or income before taking on tremendous amount of leverage just to cash flow. Buy quality properties and that should allow you to scale naturally as they increase cash flow. Don't get caught up in the amount of units. Less is more!

[Nathan Gesner]

Quote from @Jennah Sontag:

The problem with using a line of credit is that you are borrowing (usually at a higher interest rate) in order to borrow. It's too much leverage. We had a housing crash in 2008 because people overpaid and borrowed too much.

[Paul De Luca]

Quote from @Jennah Sontag:

Let's say I purchase my first door with a conventional loan. Then to get my 2nd door, is it better to finance with another conventional loan or get a line of credit by borrowing off my first property (then get a line of credit from my 2nd door to put toward my 3rd door and repeat the cycle)? I don't understand the risks involved with either approach to know which is better. Thanks for any insights!

 It really depends on how much cash you have, your loan pre approvals, if you can house hack or not, and your overall strategy. 

[Christian Ehlers]

@Jennah Sontag I would agree that it's likely better to get conventional loans for your first few properties, and once you have experience under your belt and have managed a few properties for a bit you can scale using DSCR loans as @Robin Simon suggested. Using a HELOC as downpayment on your next home can be done, but the homes have to cashflow a TON to take on the extra leverage and rate you are paying on the HELOC, and it's incredibly risky.

I'd suggest to Househack a few properties using low down payments to get started, make sure they can pay for themselves, then scale from there once you have the hang of it. 

[Sarita Scherpereel]

@Jennah Sontag There are so many ways to approach this. Your first purchase should have an exit strategy that helps prepare you for property number two. If you purchase your first property ideal you do some type of reno/project on it to increase the value...if you do decide to do a LOC. The interest rates are higher. So keep that in mind.

If you haven't looked into house hacking, you should. There are a lot of lower down payment programs that will help you get started. Going this route allows you to save more money for your second property. But there are many ways to create an investing strategy. Talk to some realtors and investors in your area (or where you're going to start purchasing) to see what they think are great strategies for your market. Best of luck! 

[Eliott Elias]

You use non QM loans such as hard money and DSCR to get you in to as many properties as possible. Rates suck but the money is easy to get