How do you scale from 2 properties to 100?

19 Replies

Fellow BP friends,

Please educate me on how to grow from 2 to 100 1-4 family rental properties. I get bogged down around 10 in the feasibility on the financing end. I would plan to outsource management until it became feasible to start my own management company.

My understand is that one would need commercial financing starting with the 11th property, but on what kind of terms? Isn't it always going to be on shorter-term loans which put you at interest rate risk regarding holding the property long term? Another option is owner-financing, but how often is this a real option? Aren't 95% of sellers of 1-4 family properties against owner-financing?

Is there an obvious way to do this that I am missing?

Those of you who have gone from 0 to 20 or 100 or 500, I would love to get your advice.

Thank you!

-Josiah Smelser

There are specialized lender that do long term deals. I know Bob Green has some programs he maybe able to help you. I would likely talk to REI group in your area they would know the lenders that handle that type of loans.

There are many options available to those who have a good deal. You can go into a Joint Venture with someone, borrow from a Portfolio Lender, borrow Private Money, work with a Hard Money Lender, etc. 

I started with the goal of 20 rental properties in 2009.  That sure feels like long time ago now and a lot of properties ago.  

Know what you're good at

Know your numbers

Buyer under market

Know your goals

My model: Buy distressed properties under market (preferably WAY under market), fix the distress (tenant issue, property condition issue, owner issue), stabilize and refinance. I typically package 10-20 to a commercial bank or credit union at a time. The loans are usually 5-10 year fixed rate, 10 year balloon, amortized over 25-30 at 65-70% of LTV (they don't care about cost).

At this time I can typically use cash or a line of credit for my work in progress inventory.  When I started I used hard money loans or private loans (and lots of them).  

You will need experience before a local bank will work with you.  You will need to focus on properties that have strong cash flow where a 2-3% increase in rates won't kill you.  You will need to find a way to buy under market enough to cover your equity requirement or you will need cash to make up the difference.  To solve that problem I flipped houses.

Owning 100+ houses isn't for everyone but it can be done.  I know guys that have 10-12 free and clear and they seem to be doing just fine.

There are two main ways to go about it. 

First, if you are focused on owning 100 SFR, then you will need to look into jumbo loans that will cover multiple properties under one mortgage. These will be generally considered as commercial financing but longer terms are available.

Most "large" investors will eventually move away from SFR and step over into larger multi-family properties. Not only is the per unit costs much lower (and hence the potential for cash flow is higher), but they become much easier to finance.

My advice is to invest in 10 SFR and then sell off when the market is strong and take the profits and invest in multi-family.

we had basically a 50% increase in one year. Bought a complex with 8-4plexes, plus two SFR's. Went from 60 some to 90 some basically over night. Before that we had bought as many as 13 or 14 in a given year. Some times just a couple in a year. Bought house #1 in 2002.

One deal at a time.

Buy cheap houses. 

@Josiah Smelser OK I will give a serious answer. As already said one bite at a time. As you grow the type of financing you can get will change. even if your portfolio isn't growing much, terms, types of loans, restrictions etc vary over time.

It often means a variety of sources; hard money lenders, private lenders, smaller banks that are portfolio lenders, Commercial loans, Blanket loans, lines of credit etc. If you are growing you always need to be looking out for financing.

Thanks all. I have not run into any issue financing to this point, but getting past 10 will be different. Can someone provide a bit more detail on the options available after 10? Which option is the best course of action in your opinion? What has your experience been with hard money lenders, portfolio loans, owner financing, etc? I know what those terms mean but haven't had any experience utilizing them. Thanks!

@Account Closed Leverage Leverage Leverage ... sure you haven't had trouble financing but like most of us your own personal funds are limited. The higher you can leverage, while still maintaining a reasonable cost of funds will open up the opportunity to acquire more properties and not lose out on potential profits.

Then you got to find the deals. Expand the markets you're in and look for the path least traveled. 

Best of luck!!

If you are not close to 10 yet and having no problems then wait until it is an issue. Like I said above options change over time.

if you are at 10 or close to it start talking to lenders. When it comes to traditional lenders, smaller local or regional banks tend to be the best. They are also more likely to be interested in the relationship and getting to know you. Start building those relationships now. 

Network with local investors and find out who they are using. 

Personally I would be looking for blanket loans and portfolio lenders.

To answer your question...  the best option is probably to use all of the above. 

In short, I think the idea is to use higher interest shorter term financing to raise the value of the homes and prove the value with a rental history.

Then refinance using the new LTV ratio with lower interest rates and longer terms.

There are threads about nightmares about each kind of financing.

But... I think everyone here is right.  Focus on getting a good deal.  Focus on getting a good deal.  Focus on getting a good deal.

If buy a home for 30% of market value basically any kind of financing will work.

Thanks all. You guys are awesome. Is 30% below market value your hurdle if you already like the property's location, appreciation prospect, etc?

Originally posted by @Account Closed :

Thanks all. You guys are awesome. Is 30% below market value your hurdle if you already like the property's location, appreciation prospect, etc?

 If I am going to hold, % below market is not important to me. Of course I would like to buy below market and have instant equity, but the more important criteria is what kind of return am I likely to make on my investment.  There are times when you can buy at market value and still have property cash flow fine.  2008-2010 was an example of that kind of time. 

However financing needs to be considered. If you buy below market, or build equity through renovations, it means you have more opportunity to refinance and get original cash invested back out.

So what kind of return should you expect? Well that will be different for everyone. Some will buy in nicer areas and assume some appreciation. Some will buy in cash flow only areas and expect no cash flow but not expect any appreciation. Some have high incomes and the ability to save more cash for the next deal quickly. Some have little cash and choose to wait for the best deals.

I have only modest ability to raise capital to invest. However I have a strong ability to find outstanding deals. So my criteria are

  • Is it a GREAT deal?
  • Can I pull it off?

For me that means I want about a 15%+ cash on cash return.

When it comes to investment properties, I would focus less on the purchase price and more on the cash flow. There are plenty of below market properties that cannot create a positive cash flow. 

For right now, focus on creating a low risk investment opportunity by not over leveraging and keeping a good reserve. This will help to build your credibility when it comes time to expand past the 10 property limit. As @Ned Carey mentioned, start now to build a good relationship with portfolio lenders.