I'm at 11 units, now what? Thoughts welcomed on what to do NEXT

Starting Out
7yFollow

I'm at 11 units, now what? Thoughts welcomed on what to do NEXT

Jonathan Li
Rental Property Investor · Nomadic · Member since 2018 · 22 posts · 23 votes

Hello!

First off, huge thanks to the BiggerPockets community, podcasts, tools and depth of thread topics; I wouldn't have gotten nearly anywhere close to where I am without the existence of BiggerPockets. 

I currently work a full-time job in the engineering/construction industry in Kansas City, MO. I grew my net worth through saving and stock growth throughout the years. I have always been an entrepreneurial thinker who was always experimenting interests in all sorts of hobbies and activities to reach financial independence for me and my future family. 2018 was the year to do something much different. I stumbled upon a few REI videos on YouTube, a few videos turned into probably all the videos YouTube could offer on REI. Then I purchased and read Brandon Turner's book. I took action and went PRO on BP, and it's been quite a ride since then. 

Eight months ago, I decided to purchase my first investment property, a turn-key, tenant occupied duplex. No issues, tenants paid, cash flowed, minimal service calls! 

The following milestones took place since then on weekdays after work and on weekends: 

May - purchase of second duplex

June - purchase of third duplex 

July - purchase of a triplex

October - purchase of forth duplex 

I financed all the properties through conventional 25%-down loans and the properties are more or less considered turn-key properties with minor work needed. The reason this strategy started developed in my mind was that I didn't want to 'risk' running into a construction/rehab nightmare with uncertainty. no BRRRR for me :(. I also didn't have the time to set aside to do so (full-time job requires a solid 40-60 hrs/week).

I have established that my goal is to one day own 50 units or $9,000/mo ($180/mo/unit) in net cash flow to reach financial independence. 

Lately, I have been feeling lost for next and best steps forward. Although one can qualify for up to 10 conventional loans, I am taking second thoughts on the large down payments. 

- Do I keep buying turn-key duplexes if they appear to be a great deal? 

- or do I save my money to buy a 6 or 8-unit apartment building? 

- What are other financing methods which require smaller down payments and allow me to scale quicker? 

Thank you in advance for all your input! 

12Reply
113 views

Most Popular Reply

Jerry W.Pro Member
Moderator
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
7y

@Jonathan Li, welcome to BP. You have done an amazing amount of action in a VERY short time. I can only give advice based upon my personal experience. One you might take a short breather and see how things work. Spend some time building your systems to handle the increased volume. Make sure you have good sources for plumbers, electricians, handymen, etc. I myself tend to buy distressed properties and fix them up to rent, mostly because cash flow stinks in my area. Buying houses in my area ready to rent in most cases would result in negative cash flow. You might consider a 4 plex next. it is a halfway step between duplexes and apartment buildings. You can still use conventional financing. See how managing that goes. Let us know if you manage yourself and how your systems are set up as well. Depending on how things go you can decide if you want a 6 or 10 or larger commercial property. You might actually go one full year to make sure your rental income will count for purposes of figuring your income to afford more loans. Your DTI will need to be looked at too.

11Reply
See this reply in the discussion

38 Replies

Jump to latestLatest
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    7y

    @Jonathan Li, welcome to BP. You have done an amazing amount of action in a VERY short time. I can only give advice based upon my personal experience. One you might take a short breather and see how things work. Spend some time building your systems to handle the increased volume. Make sure you have good sources for plumbers, electricians, handymen, etc. I myself tend to buy distressed properties and fix them up to rent, mostly because cash flow stinks in my area. Buying houses in my area ready to rent in most cases would result in negative cash flow. You might consider a 4 plex next. it is a halfway step between duplexes and apartment buildings. You can still use conventional financing. See how managing that goes. Let us know if you manage yourself and how your systems are set up as well. Depending on how things go you can decide if you want a 6 or 10 or larger commercial property. You might actually go one full year to make sure your rental income will count for purposes of figuring your income to afford more loans. Your DTI will need to be looked at too.

    11Reply
  • Justin R.Pro Member
    Rental Property Investor · San Anselmo · Member since 2015 · 659 posts · 600 votes
    7y

    Hello @Jonathan Li

    First of all congratulations on your first several units! Everyone has an opinion on turnkeys, but you have made an educated decision on why they work for you.

    In regard to financing, if you get a handful in the same geographical area, you could possibly get a blanket style loan from a small portfolio lender. I would call around, and meet us some small local bank lenders and see if they would be open to this loan. This would then move it from a conventional loan to a commercial loan, which would free up your Fannie/Freddie for future acquisitions. Just be aware that these commercial loans are slightly higher interest, shorter terms, and typically adjustable.

    Doing some reverse engineering, 50 units averaging 50k a unit would place your portfolio at approximately 2.5m. If you continue needing 25% down, your gonna need 625k in capital for your down payments alone. Realistically, you could be better served finding "deals" with built in equity or force your own equity through rehab, and this would drastically cut down your capital needed for down payments.

    Best of luck!!

    7Reply
  • Nathan Bise
    Flipper/Rehabber · Hager City, WI · Member since 2018 · 22 posts · 10 votes
    7y
    @Jonathan Li This is a great question. I'm a new REI and current contractor that works for numerous Larger multi family property owners (7 to 35 units) myself and so I was actually hoping to see someone else already have responded so I could actually gain something from it besides my thoughts and what experience watching clients gain wealth from tells me. Since that is not the case... Heres a newbie thought. Go with your gut or heart or mind...whatever is saying larger multi unit properties. *Options to reduce your up front capitol for larger investment properties. Or any property for that matter.... 1. Create, host or find a syndicate structured deal. 2. Joint venture with someone 3. Work directly with current owner to get creative. Youve gone this far already.. I can only imagine he success you'll have. 50 is just the beggining!
    2Reply
  • Nathan Bise
    Flipper/Rehabber · Hager City, WI · Member since 2018 · 22 posts · 10 votes
    7y
    @Nathan Bise I took to long to compose... Couple replies came in while I was... Lol..
    0Reply
  • Nathan Bise
    Flipper/Rehabber · Hager City, WI · Member since 2018 · 22 posts · 10 votes
    7y
    @Justin R. Great advice. Love the train of thought.
    0Reply
  • Jonathan Li
    OP
    Rental Property Investor · Nomadic · Member since 2018 · 22 posts · 23 votes
    7y
    Originally posted by @Jerry W.:

    @Jonathan Li, welcome to BP. You have done an amazing amount of action in a VERY short time. I can only give advice based upon my personal experience. One you might take a short breather and see how things work. Spend some time building your systems to handle the increased volume. Make sure you have good sources for plumbers, electricians, handymen, etc. I myself tend to buy distressed properties and fix them up to rent, mostly because cash flow stinks in my area. Buying houses in my area ready to rent in most cases would result in negative cash flow. You might consider a 4 plex next. it is a halfway step between duplexes and apartment buildings. You can still use conventional financing. See how managing that goes. Let us know if you manage yourself and how your systems are set up as well. Depending on how things go you can decide if you want a 6 or 10 or larger commercial property. You might actually go one full year to make sure your rental income will count for purposes of figuring your income to afford more loans. Your DTI will need to be looked at too.

    Thank you for the warm welcome Jerry! I have almost forgotten about the almighty 4-plex, I suppose they have been rare on the market lately. I believe I have a decent system set-up where I have a good handyman, plumber, and electrician who service all my units. I property manage on my own, but I understand that this won't last forever as I scale so I am continually looking for a trusting and competent property manager in the near future. I am continually tracking my DTI in which I still have 'room'.

    2Reply
  • Jonathan Li
    OP
    Rental Property Investor · Nomadic · Member since 2018 · 22 posts · 23 votes
    7y
    Originally posted by @Justin R.:

    Hello @Jonathan Li

    First of all congratulations on your first several units! Everyone has an opinion on turnkeys, but you have made an educated decision on why they work for you.

    In regard to financing, if you get a handful in the same geographical area, you could possibly get a blanket style loan from a small portfolio lender. I would call around, and meet us some small local bank lenders and see if they would be open to this loan. This would then move it from a conventional loan to a commercial loan, which would free up your Fannie/Freddie for future acquisitions. Just be aware that these commercial loans are slightly higher interest, shorter terms, and typically adjustable.

    Doing some reverse engineering, 50 units averaging 50k a unit would place your portfolio at approximately 2.5m. If you continue needing 25% down, your gonna need 625k in capital for your down payments alone. Realistically, you could be better served finding "deals" with built in equity or force your own equity through rehab, and this would drastically cut down your capital needed for down payments.

    Best of luck!!

    Thank you Justin!!! I will definitely call around to get more details on blanket style loans from portfolio lenders and see what options are there. Perhaps with a slightly higher interest, and other terms, would they allow me to cash-out for a smaller LTV?

    Nice perspective with the reverse engineering, I am hoping to find a way around the 25% down! I may look into rehab deals or possibly partner with someone who rehabs in the near future, but I just wanted to explore the idea of not going that route, if there are any other alternatives in my situation! 

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    well......  i think taking a breather and seeing how the economy is going to fare might be prudent.   While you are enjoying your breather you could start researching the MF market etc.   Nothing wrong with enjoying your sucess for a bit!

    1Reply
  • Matt Nusbaum
    Rental Property Investor · Annapolis, MD · Member since 2011 · 232 posts · 170 votes
    7y

    @Jonathan Li Congrats on getting to where you are! As far as next steps... GO BIG! Find a partner/investors and scale up into bigger MF. You've got the foundation already.

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    7y

    Are you buying in areas where properties are appreciating rapidly? 

    If you expect 50 units to bring you 9K per month, that means that you're basing that on present holdings, which works out to be $ 180/month positive cash flow per unit - or $ 360/duplex.

    Let's say you pay 100K for a turnkey duplex, that would bring your downpayment to 25K per duplex. Add closing cost, each duplex costs you about 30K cash. And your annual return is $ 4320 ($ 360 x 12) or about 15%. 

    But that does not take into consideration any kind of repairs at all, which will happen, like it or not.

    Only you can decide, whether these are the best deals to buy for your money.

    What are you paying for your turnkey duplexes? That would give more exact numbers. The more you're paying, the lower your ROI goes.

    3Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    7y

    @Jonathan Li Congrats on your success :) Its nice seeing another young guy doing well too!

    Personally you're going to need to get your hands dirty at some point. Pick up a discount property, put some work into it and do a cashout refi later.

    Also get friendly with your commercial lenders. youll get to a point where they wont even ask for your DTI, W2, etc etc.

    3Reply
  • Jonathan Li
    OP
    Rental Property Investor · Nomadic · Member since 2018 · 22 posts · 23 votes
    7y
    Originally posted by @David Zheng:

    @Jonathan Li Congrats on your success :) Its nice seeing another young guy doing well too!

    Personally you're going to need to get your hands dirty at some point. Pick up a discount property, put some work into it and do a cashout refi later.

    Also get friendly with your commercial lenders. youll get to a point where they wont even ask for your DTI, W2, etc etc.

     Appreciate it! Great advice, I look forward to talking with some commercial lenders to see what products they have in store! 

    1Reply
  • Jonathan Li
    OP
    Rental Property Investor · Nomadic · Member since 2018 · 22 posts · 23 votes
    7y
    Originally posted by @Michaela G.:

    Are you buying in areas where properties are appreciating rapidly? 

    If you expect 50 units to bring you 9K per month, that means that you're basing that on present holdings, which works out to be $ 180/month positive cash flow per unit - or $ 360/duplex.

    Let's say you pay 100K for a turnkey duplex, that would bring your downpayment to 25K per duplex. Add closing cost, each duplex costs you about 30K cash. And your annual return is $ 4320 ($ 360 x 12) or about 15%. 

    But that does not take into consideration any kind of repairs at all, which will happen, like it or not.

    Only you can decide, whether these are the best deals to buy for your money.

    What are you paying for your turnkey duplexes? That would give more exact numbers. The more you're paying, the lower your ROI goes.

     Hi Michaela, appreciation would probably be at a rate of 1.5-2%/annum.. I don't value appreciation to heart, but rather the sustainability/demand of the rental market and what I can get in rents versus my overall outgoing costs. $180/mo/unit in cash flow is conservative, I am seeing more like $200-$225/mo/unit after setting aside money for repairs/capex/vacancy/pm (paying myself for pm). A typical duplex with these returns cost about $35-40K after closing costs.

    4Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    7y

    Wow, the whole duplex turnkey for 35-40K. That's pretty nice. How are you getting your mortgages, since a lot of bankers won't touch anything under 50K?

    3Reply
  • AJ P.
    Residential Real Estate Broker · Napa, CA · Member since 2010 · 21 posts · 32 votes
    7y

    Nice work! Find an investor/partner and look to scale into bigger multi-family opportunities. You've already got a solid foundation. There's money out there with lenders looking to deploy capital. Finding the deals might be the harder part right now, but they are out there. Best of luck!

    1Reply
  • Jonathan Li
    OP
    Rental Property Investor · Nomadic · Member since 2018 · 22 posts · 23 votes
    7y
    Originally posted by @Michaela G.:

    Wow, the whole duplex turnkey for 35-40K. That's pretty nice. How are you getting your mortgages, since a lot of bankers won't touch anything under 50K?

     Apologies, I meant $35-40K for the down payment (including closing costs); purchase price is $130-150K. Conventional 25% down mortgages on all purchases, that is why I am taking second thoughts on continuing to pour so much cash into such deals. Looking for alternatives and next steps to scale! Researching the possibility of 1031 exchanges and scaling larger may be worthwhile... 

    1Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    7y

    So, I think it's awesome that you've accumulated 11 units in such a short time and are not losing money. 

    Your next step, which is what brought you here, is to do deals that are more profitable. (It's 10% ROI, if you have no repairs and no vacancies at all - which isn't realistic).

    You can do it! Yes, look around at some Multi-family deals and maybe sell the properties you have, because if there's no major development happening or anything else that might help you with quick appreciation, what looks like great cashflow can easily be eaten up with a vacancy or repairs. The cashflow looks great, because you put 25% down. If you had put down 50%, it would have looked even better, but it's sort of misleading yourself. 

    So, now that you've shown yourself that you can do it, go out there and do even better. 

    If you were to sell now, since you paid market price, you probably won't have the need for a 1031, because there'll be no profit. 

    3Reply
  • Stephen Chaney
    Greenville, IL · Member since 2018 · 36 posts · 9 votes
    7y

    Very nice work Jonathon! My wife and I are in nearly the same boat as you, and we are geographically close!  We are up to 13 units in our first six months using commercial loans. I've sent you a colleague request with an introduction. Most banks have a maximum amount of loans they will issue to any single borrower. I would ask your bank what that would be for you! Our next step will be to start partnering up with folks on your side of the river to expand our business.

    1Reply
  • Richard Sherman
    Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes
    7y

    @Jonathan Li 11 Units!  Awesome!  Now add a zero to that buddy!  Keep it up!  

    Here is how we did it..

    Years 1-2 - 0 to 8

    Years  2-4 - 8 to 8

    Years 4-6 - 8 to 12

    Year 7 - 12 to 16

    Year 8- 16 to 25

    Year 9- 25 to 65 (still going this year, should close on another 20 before year end.)

    This doesn't count 8 units in Memphis...haha, they count as like 2 of my Oregon units by value...so throw in some more there

    1Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    7y

    @Jonathan Li, a couple points to think about.  First I don't think you can 1031 on a property you have owned for less than a year.  You might ask a professional like a 1031 specialist on that.  Next don't use up all of your cash reserves.  After you get a larger number of units it is possible to have multiple large repairs all happen closely to each other.  Maybe 2 sewers need replaced at once or one needs a roof replaced or maybe one just gets trashed by a tenant and you have $10 of repairs on 3 different properties.  There will be some growing pains.  It is going to happen just like we all make mistakes.  I would take some time to get comfortable running the units you have.  Take the time to get more experience under your belt.  Expanding rapidly is cool , but you haven't even done one tax cycle.  You might start looking at 4 plexes and apartment buildings, but for now consolidate what you have.  In my neck of the woods November and December are painful months because property taxes come due.  While I try to plan, when I get some cash sitting around I see a property and think hey that is a pretty good deal.  Next thing I know I take money out a spare account and use to pay my 20% down.  Now comes the bad part, my wife says hey why did you take my end of year tax money?  I need $17K dollars for property tax, plus we need to pay for 2 other companies.  Until you have gone through a full years cycle you don't experience things like that.  That is usually the time the truck throws a rod, or even worse a few years ago 3 days after paying property taxes I went to pick up a load of almost 50 squares of shingles and the ball broke off the hitch of the brand new trailer I had borrowed from my friend.  When the music stopped the trailer was upside down on the freeway and there were a LOT of shingles and nails everywhere.  After tow truck fees and a hiring a flatbed semi to haul the trailer home, I wrote a check to my friend a new trailer so he could replace the old one.  The total cost was about $17K, but I did manage to salvage maybe a thousand or 2 of the roofing supplies.  I am not saying that will happen to you, but bad things will occur from time to time.  Learn and grow.  Look backwards as much as forward to learn more about your business.

    Anyway, my advice is worth what you paid for it hehe.  Either way best of luck and congratulations for an amazing story.

    8Reply
  • Peter B.
    Investor · Ogdensburg, WI · Member since 2016 · 273 posts · 351 votes
    7y

    @Jerry W.

    Your advice is spot on.  I cringe every time I read these posts and the responses. This is not a race.

    @Jonathan Li

    Congrats on your success.. Thus Far. Pump the brakes a bit here. Run your properties for awhile  and learn from your mistakes. (They usually take awhile to show up)

    I don't need to go into detail because Jerry covered it pretty well. I also have the crazy expense story.(Mine was a well,roof, furnace in november 2007 23k... another 23k in property taxes due next month yikes) You will to at some point.

    2Reply
  • Account Closed
    Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
    7y

    Lots of great comments listed. It seems clear enough that your not really to stop growing so don’t. Have you thought about picking up a few SFHs while  you are looking for your next multi unit? 

    1Reply
  • Tariq B.
    Investor · Laurel, MD · Member since 2014 · 251 posts · 140 votes
    7y

    My advice and you probably won't like it but take it for what's it's worth. As mentioned the mistakes you make now will show up later. I started about 5 years ago and just now are the mistakes I made along the way hitting me all at once this year. CAPEX wise this has been an awful year. Thankfully I had reserves to ride out the storm. My point is if you scale too fast you may be setting yourself up for failure. I was able to get through this tough time because I had bumps along the way to give me exposure to issues but if I had no experience handling repairs I would of probably cried myself to sleep and sold everything. If you have one AC unit go out you aren't in bad shape.

    Take it slow learn the management game, much easier to learn with 11 than 50. Congrats on getting the portfolio. However, If there is one thing I learned this year it's that anyone can buy a property, but can they keep it. 

    4Reply
  • Jason Graves
    Rental Property Investor · San Diego, CA · Member since 2018 · 242 posts · 234 votes
    7y
    @Jonathan Li My story is similar. Just got into multi units 9 months ago. I also hane a full tine job. Property 1 7 plex Property 2 13 plex Property 3 5 plex All in Kansas City MO My next step it to partner syndicate on larger project in $3-$5m range. Let’s talk Jason
    1Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    7y
    @Jonathan Li Nice work getting to where you are! I also invest in KC, great market for rental properties. Do you have equity in any of your properties? If so you could sell one and 1031 into something larger. I’m selling a KC duplex right now and buying an 8plex. I’ll have to bring some capital to the deal but the 1031 will be the bulk of the DP. Its value add, so I’ll increase the value and refi in about 18-24 months. I would suggest getting into value add commercial properties and maybe taking on a partner or trusted contractor who can oversee the value add. I usually buy cash, do rehab, the take out a commercial cash-out refi loan. Commercial loans are a little less down and they don’t care about your DTI. I’d start building relationships with commercial bankers. There are some good KC BP meetups and those folks will probably have some good referrals for you in terms of bankers. Also, small MF is hot in KC so you might be able to sell for a profit even if you only recently bought, something to consider to ladder up into bigger props!
    Podcast Guest on Show #373
    2Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free