Growing number of properties

7 Replies

I have a basic newbie question about growing the number of properties I own. I own one SFH which is slightly cash-flow positive, and based on savings and income from other sources, I can likely tolerate a few months of vacancy. However, if I expand to, say, 3 or more properties, or even multi-family, there's likely no way I can foot the monthly payments if all homes/units were to become vacant at the same time. So how to avoid this risk while still growing my real estate portfolio? Or is it unavoidable and am I just hedging on multiple properties not becoming vacant simultaneously?

It seems to me that growth without significant equity already in place in a portfolio comes at the expense of risk from over-leveraging, unless I'm missing something. 

There’s really no way around it. I personally will get to a certain number of properties then deleverage some before going on

Create a reserve account with some cushion to help cover payments if needed. Also over time you'll learn your typical vacancy rates and personal risk tolerance. If you buy the right houses the likelihood of all your units being empty at one time is probably low. We've been fortunate to have vacancy less than 1% since 2014.

You've hit one of the nails of this business on the head. It's very hard to take negative operating cost shots to the chin if they happen across a number of your properties. And at some point, it will, no matter how you scheme and work to protect yourself against it. You need to be careful about picking tenants who won't pick up and vacate at a moment's notice, you need to be a decent landlord to keep this from happening, but you certainly need to have significant reserves in place for when things get tough.

Leveraged-to-the-gills operators preening about how perfect their systems are will always try to tell you with a confident grin that they've got vacancy calculations down to a science -- they don't always. They'll tell you that a certain amount of money put aside each month out of the gross rental income of each property will surely cover unexpected expenses -- it won't always. They'll tell you that if you grow and grow while leveraging debt all the way you'll manage to grow your way out of this problem -- you won't always. What they won't tell you is that AN UNEXPECTED BAD THING just has to happen to you ONCE, JUST ONE TIME, to BREAK YOU. To over-leverage like they do, you will have to be right ALL THE TIME.

And that, very simply, does not happen  because we are all simple mortals, not gods.

The more doors you have lowers the financial risk of vacancies. Because more doors creates greater cash flow and multiple vacancies is uncommon you are actually more financially secure when they do occur.

It is the same as owning a SFH or a multi. A vacancy in a sfh is a 100% loss of income, a vacancy in a multi may only be 25% loss of income. The reality is that vacancies are not as big of a deal that small landlords make of it. It's mostly fear mongering.

The more doors the greater your financial security. If you fear risk do not invest.

Originally posted by @Hasnain Akram :

I have a basic newbie question about growing the number of properties I own. I own one SFH which is slightly cash-flow positive, and based on savings and income from other sources, I can likely tolerate a few months of vacancy. However, if I expand to, say, 3 or more properties, or even multi-family, there's likely no way I can foot the monthly payments if all homes/units were to become vacant at the same time. So how to avoid this risk while still growing my real estate portfolio? Or is it unavoidable and am I just hedging on multiple properties not becoming vacant simultaneously?

It seems to me that growth without significant equity already in place in a portfolio comes at the expense of risk from over-leveraging, unless I'm missing something. 

 Stay within the borders of your capacity, that does not mean your comfort zone. I have found myself uncomfortable for the good of expansion far too many times, I do not think this is something that I will ever solve, as my aspirations re in the tens of thousands of doors 0 have no fear march forward and look back later once sitting on the eternal pile of real estate. 

@Hasnain Akram , There is a lot of good advice.  It is tempting to purchase another property as soon as you have enough in the bank account, trust me i know.  Keep some money set aside for all your maintenance and vacancies.  Set a number in your head and dont let that account go below that amount.  Missing a good deal is way better than getting a good deal and then all your cards crumble from a couple vacancies and a lack of reserves. My wife and i have been on a 1 property per year purchase plan, and it seems to be working out between personal savings and cash flow. 

Good luck!

DJ