I'm a 23 year old college student. When I get out of the military(officer). Instead of buying a home, I'm confident, that I'm buying a 4 unit owner occupied, live in one and rent out the other three. Hopefully, If I finese it right I should be able to cover the mortgage on the place, and live rent free. The savings over a 5 year period, I want to start to invest in real estate as long term investment vehicle. My goal is is establish an LLC, and hopefully acquire about 100 units over the course of my life. I figure if I'm able to reach this goal and hold and let the tenants pay of the mortgages, I'd have considerable net worth and plenty of cash flow in retirement. Obviously a lot can change. But I'm pretty set in my belief that real estate is a long term investment vehicle that is relatively safe. My question is what is the best strategy to go about this as safely as possible? It would take forever doing this by acquiring two and 4 units.
Real Estate Attorney · Syracuse/New York, NY · Member since 2008 · 29 posts · 4 votes
18y
hi hustler,
i think you've got great plans. my regret is that i didn't start investing in real estate right after i got out of college. instead, i spent several years working at a great paying job representing landlords as their attorney (and dreaming about being a landlord myself) and never actually taking the leap until years after i should have. i've since quit that job, i now spend my full time investing and i own my own real estate brokerage and property management firm. So my advice....follow through with your plans! Buying the 4-unit is a great investment.
One tip, check out the listings for HUD homes in your area (http://www.hud.gov/homes/index.cfm). These are properties (many of which can only be sold to individuals who intend to owner occupy) that can be bought at SUBSTANTIAL discount from market prices (essentially, they are foreclosures from gov't backed loans). You may find a multi-family on their listings, but you do have to bid for the property and you may not win the bid, but keep trying.
Additionally, you've got the right mentality - think long term. that's definitely playing it safe. Never buy a property based entirely on price trends (people who bet on appreciation lost their shirts in places like florida). Always do your research. Know the area you are buying in. If you're buying a 3-bedroom house that you want to rent out, spend time looking at 3-bedroom rentals in that area so you know exactly what you can get in rent. Factor in expected costs (i.e., 5% vacancy rate; 5% maintenance costs, property taxes, insurance, utilities, property management fees, advertising). My personal belief, if you're buying long-term, stay away from mortgages with adjustable rates.
Your cashflow may not be much in the beginning, but over time, as rents increase, you can start seeing some very good returns even after several years. Just do the math first and never buy a property that doesn't cashflow. Also, always get a property inspector to look at the property for you. Avoid buying properties that require major structural work as they can be money pits - unless you plan to go into the rehabbing business and you know what you're doing. MAke sure you interview property managers. Don't hire some mom & pop operation that offers a cheap fee but they can't deliver on service because they have more properties they can handle.
One other thing about LLCs or corporations - these are EASY to form, BUT banks are very weary about giving mortgages to new companies. Many banks don't unless you're buying a bigger property. It will be a LOT easier for you to buy in your individual capacity even though that will create limitations once you've bought a certain number of properties - banks are hesitant to give too many mortgages to one person. Also remember this rule - always make sure you keep your credit score high!
All in all, 100 properties in your lifetime?? Don't be so modest. If you do it right, you can reach that goal in the next 5 years if you choose to. Hope this was useful. Good luck!!!
Thats what I don't understand about buying multiple properties in ones name. Eventually wouldn't you hit a certain DTI where you would no longer be able to get anymore mortgages in ones name? How does one build a portfolio of 9 to 10 multiunit places without running into DTI issues. I am being modest but 100 units is a massive portfolio you're talking about what will be almost tons in gross rental income when I retire.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
18y
When you have a rental property, the rent goes on the income side. Its my understanding that banks will typically allow 75% of the rent as income.
Be aware there are a lot of expenses associated with any property, and more for rentals than a property you occupy. If the rent on the other three units in your fourplex covers the payment (which typically includes taxes and insurance), you're still on the negative side. Not necessarily bad, since you're not paying rent, but you won't be living for free. You will have costs that you have to cover in addition to the payments.
Your personal income would certainly be mostly irrelevant for 100 unit apartment complex. The complex would need to support itself. Lender's measure that based on the "debt service coverage ratio" (DSCR) or various permutations on that term. Basically, that ratio takes your net operating income (gross rent less vacancies and all expenses but not the payment) divided by the payment. The larger the better. Lenders will typically want to see a value of 1.15, 1.2, or higher. But, it varies all over the map, so you should talk to lenders when you get to this point and see what's available.
Financing gets much more creative for commercial properties and commercial loans. Owner carry on a second, cash back after closing, all sorts of things that wouldn't be legit on residential loans. However, rates tend to be higher and terms tend to be shorter. A 30 year fixed loan is unusual. Balloon payments are also typical, such as a 5 year fixed loan with a 30 year amortization schedule. The payments are computed as if its a 30 year loan, but the entire remaining balance is due in five years.
I too would congratulate you on thinking like this at such an early age. You have plenty of time to acquire property, make some mistakes, have some success and build an excellent long term future.
When you have a rental property, the rent goes on the income side. Its my understanding that banks will typically allow 75% of the rent as income.
Be aware there are a lot of expenses associated with any property, and more for rentals than a property you occupy. If the rent on the other three units in your fourplex covers the payment (which typically includes taxes and insurance), you're still on the negative side. Not necessarily bad, since you're not paying rent, but you won't be living for free. You will have costs that you have to cover in addition to the payments.
Your personal income would certainly be mostly irrelevant for 100 unit apartment complex. The complex would need to support itself. Lender's measure that based on the "debt service coverage ratio" (DSCR) or various permutations on that term. Basically, that ratio takes your net operating income (gross rent less vacancies and all expenses but not the payment) divided by the payment. The larger the better. Lenders will typically want to see a value of 1.15, 1.2, or higher. But, it varies all over the map, so you should talk to lenders when you get to this point and see what's available.
Financing gets much more creative for commercial properties and commercial loans. Owner carry on a second, cash back after closing, all sorts of things that wouldn't be legit on residential loans. However, rates tend to be higher and terms tend to be shorter. A 30 year fixed loan is unusual. Balloon payments are also typical, such as a 5 year fixed loan with a 30 year amortization schedule. The payments are computed as if its a 30 year loan, but the entire remaining balance is due in five years.
I too would congratulate you on thinking like this at such an early age. You have plenty of time to acquire property, make some mistakes, have some success and build an excellent long term future.
Jon
Is is unsual to get 30 year fixed on smaller commercial loans like 12 units. I must say I was suprised at just how cheap some multi unit places are. Like In some areas you can find a 12-15 unit for less than a half a million dollars. Now obviously you have becoup expenses and it may be a bad deal..but I just always assumed that buying a building like that required tons of money to purchase. So I know there is oppurtunity out there when I'm ready. Right now I want to focus on making sure my credit is established and working up the down payment on that 4 unit. So that when I get out, I'll be able to find me a nice to place jump right in.
Realtor · Miami, FL · Member since 2008 · 48 posts · 4 votes
18y
100 units in your lifetime is very minimal. You should be shooting for bigger numbers especially if you are serious about creating wealth for yourself. Real estate is always risky no matter how you go about it, it will make it easier if you know exactly what strategies you are implementing and you will have more exit strategies underneathe your belt.
Go for the gold and make sure you are doing things correctly. I personally wouldnt hold any property unless I have some sort of cash flow coming in. It will make it easier to invest in real estate especially if you are planning to buy and hold onto property.
Real Estate Coach · Jackson, MS · Member since 2008 · 18 posts · 1 vote
18y
If you want to really grow your financing you have to start exploring options beyond the "fannie mae 10". Establishing relationships with local bankers will open up worlds to your investing.