At this point, I am a prospective investor who is looking to get into multifamily real estate. In short, I'm in the research phase of my development and in doing so, I've encountered several strategies for acquiring real estate and developing a portfolio.
Whether it be 20% down and then later, utilizing another 20% down to buy more properties, or by utilizing the BRRR method, the thing that I can't seem to understand is how anyone is profiting if they're constantly owing money to the bank, without paying off the mortgage in full from the first property?
On the surface, it appears that you're only making partial payments on one property, and then moving on to the next property by adding another mortgage that you're still responsible to pay for with interest. It would seem that if you're always in the red, that at some point, you could get yourself into a lot trouble with the bank or potentially ruin your credit.
At this point, I am a prospective investor who is looking to get into multifamily real estate. In short, I'm in the research phase of my development and in doing so, I've encountered several strategies for acquiring real estate and developing a portfolio.
Whether it be 20% down and then later, utilizing another 20% down to buy more properties, or by utilizing the BRRR method, the thing that I can't seem to understand is how anyone is profiting if they're constantly owing money to the bank, without paying off the mortgage in full from the first property?
On the surface, it appears that you're only making partial payments on one property, and then moving on to the next property by adding another mortgage that you're still responsible to pay for with interest. It would seem that if you're always in the red, that at some point, you could get yourself into a lot trouble with the bank or potentially ruin your credit.
Sounds like you can’t see the forest for all the trees!
I’ll try and keep this short… in the past 5 years my wife and I have been able to buy 46 unit (starting at age 47) mostly single family, but a mix of duplexes, and triplexes as well. All but 2 were bought using leverage. At our high point we had 19 loans and had about $1.1 million of our own money into those properties. We worked corporate jobs until we had 20 units and then both switched to real estate full time.
5 of those properties ended up being flips… we netted just under $100,000 each before capital gains on most of those. We have sold 4 other properties and through market appreciation we were able to pay off many of our first properties. We also cash out refinanced other properties that had significant appreciation and paid off additional properties.
5 years later our remaining portfolio is worth over $6 million and we have gone from 19 loans to 7. Minus out the remaining loans we would be at over $4 million in equity. While you never realize it at the moment, our timing was pretty perfect with the market run-up. Our per door cash flow is now over $600 per month after all those pay downs.
Anyone would be hard pressed to duplicate that in today’s market. But real estate is cyclical, and it will come back around.
What really motivated us was the futileness of the 4% withdrawal rule (you can only w/d 4% of your investments per year to be sure you won’t run out of money in retirement). The thought of living on $40,000 /year coming from a dual income a lot higher wasn’t going to work for us.
It starts out as a leap of faith. But real estate is SO SO powerful as a generator of wealth. The best thing is that you are pretty much in complete control of your destiny. You aren’t subject to the random swings of stock market like a passenger on a bus! Sure, you exist in the real estate market with its own ups and downs, but you choose when to buy and sell and the in between if you bought well is a pretty smooth ride!
It’s not without its excitement though on occasion… but I don’t regret one moment of the trip so far. When the markets settle back down I would encourage you to hop on and enjoy the ride!
I’m a fan of good debt and leverage. I’ve got 17 rentals with loans and have pulled equity out of my properties over the last 8 years to net me 12k/month cash flow. I owe about 1.3 million to lenders but I’m ok with it since each rental house is cash flowing me a little and my tenants are paying off this debt for me. I think real estate will go up in 10-20 years so I’m ok with this risk. And my mortgages are fixed for 15-30 years while inflation keeps going up each year. These fixed mortgage payments will look cheap in 20 years while market rent goes way up.
At this point, I am a prospective investor who is looking to get into multifamily real estate. In short, I'm in the research phase of my development and in doing so, I've encountered several strategies for acquiring real estate and developing a portfolio.
Whether it be 20% down and then later, utilizing another 20% down to buy more properties, or by utilizing the BRRR method, the thing that I can't seem to understand is how anyone is profiting if they're constantly owing money to the bank, without paying off the mortgage in full from the first property?
On the surface, it appears that you're only making partial payments on one property, and then moving on to the next property by adding another mortgage that you're still responsible to pay for with interest. It would seem that if you're always in the red, that at some point, you could get yourself into a lot trouble with the bank or potentially ruin your credit.
In short, what's the point that I'm missing?
It's a 2 part process.
Part 1, get all the PERFORMING debt one can. Or that meet's one's end goal. Keyword PERFORMING debt.
Part 2, "Kill the Bank!". This is when one flips the switch from growing cash-flow, to focusing on debt paydown. Or maybe cash-flow is so fantastic that one just sit's back and let's it coast.
Remember that rents from month 1 are paying down your debt. Think about that, someone else is paying off your debt, and putting some into your equity piggy-bank, every month.
If your 65, yeah it's hard to see much benefit to starting at 65 because it's a time-play. If your with time to do 20-30yrs, it's a no-brainer. You pay once, for something that will keep paying you for eternity. It's a math game.
@David Ogas you make sure that the rent you can charge is MORE than your mortgage, taxes, insurance, repairs, etc. You should never operate in the red. Every month should be cash flow positive.
That is a very "noob" perspective, and not accurate or true.
A person should do what's best for there specific situation. Yes, there is times where a net 0 or even minor loss on cash-flow equates to huge profits.
How about a value-add deal, where day 1 it's clocking -$200mnth cash-flow, but your still getting mortgage debt paydown, depreciation, and once tenant out can improve the place, raise rents, and gain $60k equity and much higher rents?
There is a lot, I mean a LOT of strategies and scenarios that have poor or negative cash-flow but equal BIG profits in short, mid or long term.
If your a 1 trick pony, your only as good as that 1 trick.
A lot of the older generations feel this way. They saw the great depression. Owe nobody nothing is seen as 'safe'.
But now we have rates and PI payments fixed at low rates for 15, 20 or 30 years. Easy to invest for a higher return than the interest rate of the debt.
Combining smart leverage with buying below market value is the recipe for freedom.
I had over $3M in mortgages. On the surface that sounds scary, but it's the ratio to market value and cf earned above all costs that matters.
You're not alone thinking all debt is bad, but you're also not alone if you think we need to work like we're a rat on a wheel until we're 62+ like those before us.
BAD DEBT is debt YOU personally owe. Think of your car, student loans, credit card, primary residence.
GOOD DEBT is debt SOMEBODY ELSE pays off. Investment properties are here (as long as they have positive cashflow).
Good debt also works as asset protection. If you own the property free and clear, you have a target on your back because there's a lot of equity that can be captured in a lawsuit.
A lot of the older generations feel this way. They saw the great depression. Owe nobody nothing is seen as 'safe'.
But now we have rates and PI payments fixed at low rates for 15, 20 or 30 years. Easy to invest for a higher return than the interest rate of the debt.
Combining smart leverage with buying below market value is the recipe for freedom.
I had over $3M in mortgages. On the surface that sounds scary, but it's the ratio to market value and cf earned above all costs that matters.
You're not alone thinking all debt is bad, but you're also not alone if you think we need to work like we're a rat on a wheel until we're 62+ like those before us.
When folks that's smart-investing savvy but comes from outside US and come here and see what the financial institution could offer, we all say "holly molly"....
I meant to live in the US of A without utilizing what "fannie Mae" can do for you is like ....... dont know what to say
but seriously product like 30 Year fixed rate mortgage, fanny mae, FDIC/SIPC ; that's all possible because Dollar is major currency of the world. In other advanced country offering fixed rate debt for 30 year is just sound so silly LOL
@James Hamling yes, it is a “noob” response to a “noob” question. That is exactly the point. The person asking does not appear to understand the basics, so it calls for a basic response. Generally speaking people are collecting more in rent than their mortgage and expenses. There are other factors to consider and strategies that can be used as you so aptly point out.
If your property meets the banks debt service coverage ratio they will typically lend. For smaller multi or single family often times it needs to meet debt service coverage and not valued higher than comps. When people BRRR they refinance to meet those ratios/comps but still get their money back because they bought well under value and rehabbed the property. There is a risk with any debt but there is also risk investing with cash only such as inflation eating it away and the bank procedures also assist as an extra pair of eyes on a transaction. (clean title, flood certs, assignment of leases, tax and insurance verification, etc)
If your property meets the banks debt service coverage ratio they will typically lend. For smaller multi or single family often times it needs to meet debt service coverage and not valued higher than comps. When people BRRR they refinance to meet those ratios/comps but still get their money back because they bought well under value and rehabbed the property. There is a risk with any debt but there is also risk investing with cash only such as inflation eating it away and the bank procedures also assist as an extra pair of eyes on a transaction. (clean title, flood certs, assignment of leases, tax and insurance verification, etc)
Even if it's negative cash-flow, typical 3 years appreciation in US is better investment than put save money in the bank at 2% rate. Things are different now with possibility of getting 5% though LOL.
A lot of the older generations feel this way. They saw the great depression. Owe nobody nothing is seen as 'safe'.
But now we have rates and PI payments fixed at low rates for 15, 20 or 30 years. Easy to invest for a higher return than the interest rate of the debt.
Combining smart leverage with buying below market value is the recipe for freedom.
I had over $3M in mortgages. On the surface that sounds scary, but it's the ratio to market value and cf earned above all costs that matters.
You're not alone thinking all debt is bad, but you're also not alone if you think we need to work like we're a rat on a wheel until we're 62+ like those before us.
I was also raised this way - pay off mortgages as soon as possible, save money in the bank, pay cash for everything, use coupons (what a terrible way to spend time before digital coupons, cutting out little pieces of paper, which I did). I was taught nothing about investing.
My family member thinks I've lost my mind for having 4 mortgages (3 on rentals, 1 on primary residence, 1 rental mortgage free). I did cash out refinances (one in 2021 when rates were in 3% range and another one about 6 months ago) to help me pay for renovations for a SFH with money left over to put down on future rentals. This family member and a couple of friends think I should have sold all my rentals during the sellers market of 2019 to beginning of 2022 to get the cash out - that would have been a terrible move. She owns no investment property and pays tens of thousands dollars in taxes to the IRS from her high earning W2 job and investment dividends. My rental expenses bring down my taxable income significantly. And I don't have to work until I'm age 65 or 70 at my W2 job after talking to my financial advisor.
My non-investor friends criticized me for closing on a rental recently, 6.99% conventional 30 year fixed loan. "You should have paid cash or wait for the rates to drop" I thought about paying cash but I didn't want to tie up all that money on one SFH. It took a long time to get out of the "saving money and better pay off those mortgages" mindset.
If your property meets the banks debt service coverage ratio they will typically lend. For smaller multi or single family often times it needs to meet debt service coverage and not valued higher than comps. When people BRRR they refinance to meet those ratios/comps but still get their money back because they bought well under value and rehabbed the property. There is a risk with any debt but there is also risk investing with cash only such as inflation eating it away and the bank procedures also assist as an extra pair of eyes on a transaction. (clean title, flood certs, assignment of leases, tax and insurance verification, etc)
Even if it's negative cash-flow, typical 3 years appreciation in US is better investment than put save money in the bank at 2% rate. Things are different now with possibility of getting 5% though LOL.
How much cash flow negative is acceptable? I really want to buy in an appreciation market (Nashville Tennessee, Arizona or possibly Florida Panhandle) or possibly Class A Indianapolis suburb. I can see -$100 or -$200 a month but -$500 or -$1000, that's taking a huge hit each month. I recently bought Class C potentially moving up to Class B Indianapolis SFH.
While you may not have paid off the mortgage in full on the first property, you are paying down the mortgage or rather your tenant is. So if you buy a house for $200K, get a $160K mortgage, rent it out for 10 years then sell it (assuming no appreciation). While you may still have a mortgage on it, your mortgage may only be $100K, so you've made $60K. This doesn't include rental income or fees for selling it, but that's the idea.
If your property meets the banks debt service coverage ratio they will typically lend. For smaller multi or single family often times it needs to meet debt service coverage and not valued higher than comps. When people BRRR they refinance to meet those ratios/comps but still get their money back because they bought well under value and rehabbed the property. There is a risk with any debt but there is also risk investing with cash only such as inflation eating it away and the bank procedures also assist as an extra pair of eyes on a transaction. (clean title, flood certs, assignment of leases, tax and insurance verification, etc)
Even if it's negative cash-flow, typical 3 years appreciation in US is better investment than put save money in the bank at 2% rate. Things are different now with possibility of getting 5% though LOL.
How much cash flow negative is acceptable? I really want to buy in an appreciation market (Nashville Tennessee, Arizona or possibly Florida Panhandle) or possibly Class A Indianapolis suburb. I can see -$100 or -$200 a month but -$500 or -$1000, that's taking a huge hit each month. I recently bought Class C potentially moving up to Class B Indianapolis SFH.
-200 is fine with me, it all depends on your income. This is why I still investing in Bay Area Becca. Why bother with $200 if appreciation could make $5,000 per month. In 5 years you would receive 25% of LTV position anyhow. Don't just focus on cash flow but also equity building and appreciation.
This is primary reason why I no longer invest in cash flow market because it's sufficient , at least for me.
Now with my current bay are holding I can guarantee my family for next four generation would not face any sort of housing crisis in bay area and they could get pretty good decent salary.
Real Estate is a long term game, It is a really risky over leveraging yourself. It is important to look at your own financial situation and scale accordingly.
At this point, I am a prospective investor who is looking to get into multifamily real estate. In short, I'm in the research phase of my development and in doing so, I've encountered several strategies for acquiring real estate and developing a portfolio.
Whether it be 20% down and then later, utilizing another 20% down to buy more properties, or by utilizing the BRRR method, the thing that I can't seem to understand is how anyone is profiting if they're constantly owing money to the bank, without paying off the mortgage in full from the first property?
On the surface, it appears that you're only making partial payments on one property, and then moving on to the next property by adding another mortgage that you're still responsible to pay for with interest. It would seem that if you're always in the red, that at some point, you could get yourself into a lot trouble with the bank or potentially ruin your credit.
In short, what's the point that I'm missing?
Hey there!
I totally understand why you might feel a bit confused about the concept of continuously owing money to the bank while investing in real estate. However, the key to understanding the strategy is to focus on cash flow and leverage.
When you invest in a rental property, your tenants will be paying rent. The rental income should cover the mortgage payments, property management, maintenance, taxes, and insurance, while ideally still leaving you with positive cash flow each month. This positive cash flow is your profit and can be used to pay down the mortgage or reinvest in more properties.
The BRRR (Buy, Rehab, Rent, Refinance) strategy works similarly, where you buy a distressed property, fix it up, rent it out, and then refinance it to pull your initial investment back out. The rental income should cover the new mortgage payment and other expenses, while you can use the refinance funds to acquire more properties.
The magic of leveraging other people's money (the bank's) allows you to grow your portfolio faster than if you were using only your own capital. By doing this, you can build equity in multiple properties over time, which will increase your net worth. Additionally, real estate has the potential for appreciation, which means your properties may increase in value over time, providing additional profit when you decide to sell or refinance.
As long as you are diligent with your property analysis and ensure that each investment provides positive cash flow, you can mitigate the risk of getting into financial trouble with the bank or damaging your credit. Remember, real estate investing is all about managing risk, finding good deals, and maximizing cash flow.
I hope this clears up any confusion! If you have any more questions or need further clarification, don't hesitate to reach out. Good luck on your real estate investing journey!
At this point, I am a prospective investor who is looking to get into multifamily real estate. In short, I'm in the research phase of my development and in doing so, I've encountered several strategies for acquiring real estate and developing a portfolio.
Whether it be 20% down and then later, utilizing another 20% down to buy more properties, or by utilizing the BRRR method, the thing that I can't seem to understand is how anyone is profiting if they're constantly owing money to the bank, without paying off the mortgage in full from the first property?
On the surface, it appears that you're only making partial payments on one property, and then moving on to the next property by adding another mortgage that you're still responsible to pay for with interest. It would seem that if you're always in the red, that at some point, you could get yourself into a lot trouble with the bank or potentially ruin your credit.
In short, what's the point that I'm missing?
I prefer to have a flipping and building portfolio with a rental portfolio on the side that is set for long term growth.In my opinion, you have to have high income or flips/builds to generate cash quickly. I don't like to constantly leverage my loans (how majority of people max out their approvals) to have a net positive for 200-400 a month on cash flow from a refi. The margins are too low and that's not accounting for any repairs which will mostly likely put you at break even. We have 7x our money in 18 months from the building and flipping portion which allows to have 500k to swing and another 500k in property that we use for leverage or generating atleast 15-20k net profit per property.
At this point, I am a prospective investor who is looking to get into multifamily real estate. In short, I'm in the research phase of my development and in doing so, I've encountered several strategies for acquiring real estate and developing a portfolio.
Whether it be 20% down and then later, utilizing another 20% down to buy more properties, or by utilizing the BRRR method, the thing that I can't seem to understand is how anyone is profiting if they're constantly owing money to the bank, without paying off the mortgage in full from the first property?
On the surface, it appears that you're only making partial payments on one property, and then moving on to the next property by adding another mortgage that you're still responsible to pay for with interest. It would seem that if you're always in the red, that at some point, you could get yourself into a lot trouble with the bank or potentially ruin your credit.
In short, what's the point that I'm missing?
I prefer to have a flipping and building portfolio with a rental portfolio on the side that is set for long term growth.In my opinion, you have to have high income or flips/builds to generate cash quickly. I don't like to constantly leverage my loans (how majority of people max out their approvals) to have a net positive for 200-400 a month on cash flow from a refi. The margins are too low and that's not accounting for any repairs which will mostly likely put you at break even. We have 7x our money in 18 months from the building and flipping portion which allows to have 500k to swing and another 500k in property that we use for leverage or generating atleast 15-20k net profit per property.
True, if we focus on flipping activity only it's almost guaranteed we could make *at minimum* 50k-100k every two year tax-free.
Your answer is contained in the question you first posed. Having a leveraged asset (i.e. debt) that produces gains over time (appreciation, cash flow, etc.) is not the equivalent of "being in the red." People who buy depreciating assets (e.g. most cars) and/or consumer goods with credit are "in the red." See the difference?
If your property meets the banks debt service coverage ratio they will typically lend. For smaller multi or single family often times it needs to meet debt service coverage and not valued higher than comps. When people BRRR they refinance to meet those ratios/comps but still get their money back because they bought well under value and rehabbed the property. There is a risk with any debt but there is also risk investing with cash only such as inflation eating it away and the bank procedures also assist as an extra pair of eyes on a transaction. (clean title, flood certs, assignment of leases, tax and insurance verification, etc)
Even if it's negative cash-flow, typical 3 years appreciation in US is better investment than put save money in the bank at 2% rate. Things are different now with possibility of getting 5% though LOL.
How much cash flow negative is acceptable? I really want to buy in an appreciation market (Nashville Tennessee, Arizona or possibly Florida Panhandle) or possibly Class A Indianapolis suburb. I can see -$100 or -$200 a month but -$500 or -$1000, that's taking a huge hit each month. I recently bought Class C potentially moving up to Class B Indianapolis SFH.
My rule is that your property should never be negative cash flowing. Yes it may be better than the bank rates but it's not a sustainable method. The goal is to make money, not to lose less money.
I work in Nashville and none of the deals I'm working on with my clients cash flows less than $200/mo/door. To me that's the bare minimum in order to have enough for repairs, cap ex, etc.
A lot of the older generations feel this way. They saw the great depression. Owe nobody nothing is seen as 'safe'.
But now we have rates and PI payments fixed at low rates for 15, 20 or 30 years. Easy to invest for a higher return than the interest rate of the debt.
Combining smart leverage with buying below market value is the recipe for freedom.
I had over $3M in mortgages. On the surface that sounds scary, but it's the ratio to market value and cf earned above all costs that matters.
You're not alone thinking all debt is bad, but you're also not alone if you think we need to work like we're a rat on a wheel until we're 62+ like those before us.
When folks that's smart-investing savvy but comes from outside US and come here and see what the financial institution could offer, we all say "holly molly"....
I meant to live in the US of A without utilizing what "fannie Mae" can do for you is like ....... dont know what to say
but seriously product like 30 Year fixed rate mortgage, fanny mae, FDIC/SIPC ; that's all possible because Dollar is major currency of the world. In other advanced country offering fixed rate debt for 30 year is just sound so silly LOL
I’m with you on a lot of stuff. And I have voted for a lot of your post. In my observation, though the part about Fannie Mae and Freddie Mac is that not everyone can qualify for a Freddie Mae or Fannie Mac. Some of the same people that could not qualify for government back loans due to not having Normal income have went on to build large real estate empires through other loan products or creative finance.
