New investor Soliciting for expert advice from investors
Investor · Irving, TX · Member since 2015 · 101 posts · 23 votes
Question to the experienced real-estate investors that have made it to the $1,000,000.00 mark in cash or equity or a combination of both.
I am just starting out. After many years of wanting to become a full-time investor, I made my first move.
At this time, I have a decent 6 figure job, very little debt, good credit score, but only about $10,000.00 in savings (cash). I just bought a new home to live in. I have a 4-bedroom, 3 baths, 2,300 sq. ft. home with a pool, that has approximately $100,000.00 in equity, that I have just rented out with a positive cash flow of about $280.00 a month.
I have about 15 hours a week to focus on my real-estate business. My goal is to get to the $1,000,000.00 mark in cash & equity in 2019.
To all the successful real-estate investors, based on your experience and the above scenario what is THE ONE THING I should learn or focus on to reach my goal?
All advice is welcome and appreciated
@Kenneth Kussman Your biggest asset is your income and the brain that you have which allowed you to make it. I have more than one...but they are in order of importance.
1. Cut your lifestyle. You should be aiming for 60% or higher savings rate to free up cash to plow into investments to get the train running.
2. Decide the path you want to take. Is it SFHs or is it Multifamily etc. I am a buy and hold guy, so this is biased, but your income will make you VERY bankable if you are able to save capital for down payments and that will allow you to scale using the cheapest source of leverage which are bank loans.
3. The method is less important than time in the market and you working to improve the property (like what you did to get the equity in the home you have. SFH, multi, storage it does not matter, what matters is getting a coherent system and understanding how value is created.
NOI= NOI = Total Income – (Vacancy Losses + Total Operating Expenses)
NOI/Value(price)= Cap Rate
Which also means that CHANGE in NOI / Cap Rate gets us INCREASE in value. That is your power.
You make money (capital appreciation which can be taken as INCREASED cash flow OR by taking capital out (refinance, 1031 etc) through increases NOI by either increasing revenue or decreasing expenses (ideally both.) That is the active business side of Buy and Hold. TIME will also increase your revenue as well as rents increase (assuming competent management and a normal area where rents are increasing.)
Be patient, figure out your path, do your own management until you understand what a good PM looks like and bank the savings, you might decide to do it yourself as well.
@Kenneth Kussman Your biggest asset is your income and the brain that you have which allowed you to make it. I have more than one...but they are in order of importance.
1. Cut your lifestyle. You should be aiming for 60% or higher savings rate to free up cash to plow into investments to get the train running.
2. Decide the path you want to take. Is it SFHs or is it Multifamily etc. I am a buy and hold guy, so this is biased, but your income will make you VERY bankable if you are able to save capital for down payments and that will allow you to scale using the cheapest source of leverage which are bank loans.
3. The method is less important than time in the market and you working to improve the property (like what you did to get the equity in the home you have. SFH, multi, storage it does not matter, what matters is getting a coherent system and understanding how value is created.
NOI= NOI = Total Income – (Vacancy Losses + Total Operating Expenses)
NOI/Value(price)= Cap Rate
Which also means that CHANGE in NOI / Cap Rate gets us INCREASE in value. That is your power.
You make money (capital appreciation which can be taken as INCREASED cash flow OR by taking capital out (refinance, 1031 etc) through increases NOI by either increasing revenue or decreasing expenses (ideally both.) That is the active business side of Buy and Hold. TIME will also increase your revenue as well as rents increase (assuming competent management and a normal area where rents are increasing.)
Be patient, figure out your path, do your own management until you understand what a good PM looks like and bank the savings, you might decide to do it yourself as well.
@Kenneth Kussman congrats on getting yourself into such a good position. As was mentioned by @Richard Sherman your income is going to be a huge part of getting started, and you should do whatever you can to build up those savings. It is much MUCH easier to go from 5 units to 10 than to get from 1 to 2. Whatever you can do to get your next step to be more a leap is great, even if it takes time. Don't feel like you need to be pulling the trigger on a deal every other day, be patient.
As Richard said, the other main thing you should be focusing on NOW is your strategy. You don't have to do the same type of REI forever, and there will come a time when having a diversified REI portfolio will be a very good idea, but don't muddy the waters by trying to plan for 15 years from now. Have a serious convo with yourself (and your spouse/partner if applicable) about what it is you want out of your investments. You already have the clear goal of $1m in equity by the end of 2019, so you need to work backward from there to determine next steps.
Like Richard, I am a buy and hold guy and I invest in SFRs (both professionally and personally) so this will be a biased example, but should give you some idea of what you can do to achieve your goal.
Since you have good income and credit, I assume obtaining financing isn't an issue for you. If your goal is to get to $1m in equity/cash, let's assume you need 20% of that as down payments, so $200,000. The best way to grow your portfolio is to let tenants buy your properties for you, which mean temporarily being in a debt position. If you're determined to buy everything in cash, you'll move much slower but have lower risk, so that's another consideration you need to cover before moving forward. Let's assume you use leverage to make the most of your capital.
So how do you get to $200k in cash? You have $10k, can you take a HELOC or refi your current prop to pull out cash? How close will that get you? How much can you reasonably save from your income in the next year? Develop an aggressive plan to save up your nest egg as quickly as you can. This is the frustrating part for every new investor, you'll have to do some grinding before you make any big moves.
Now, you could wait until you have all $200k to get into a portfolio all at once, or you can do it piecemeal, whatever works for you, but the strategy you employ once you have that little portfolio is crucial.
Let's say for simplicity's sake that you wait until you have a little more than $200k in cash to deploy. I can only speak for my market, so I'll use our average numbers - bear in mind that specifics will be different depending on where you invest. We're a turnkey outfit, so I'm using turnkey numbers.
[[If you want to do more DIY, BRRRR style investing you'll need to put in a lot more ongoing legwork, but you will ideally be able to force appreciation and get more equity more quickly. That's another consideration you need to cover - do you have the time/energy/inclination to do it all yourself in or to maximize potential profits, or would you rather buy market-price (even turnkey shouldn't be over market price, remember that) for a rehabbed tenant-ready prop that's managed for you? Both are can be viable and lucrative strategies, but the right move depends on your needs re the time/energy/control tradeoff.]]
Ok, so let's say you invest $200k in a portfolio of 'average' props. Our average value for a B/B+ cash flow prop is about $100k. So at 20% down, you're looking at 10 props give or take.
Now, since you don't need the income right now, you have the opportunity to accelerate your loan pay down in a pretty powerful way. This is a strategy a lot of our clients use, and while I'm using our numbers and our market data, this is a strategy that can work anywhere. Of course, the more props you have, the faster it snowballs, so investing in a market where your capital goes further definitely helps.
Anyway, with an $80k loan at an assumed rate of let's say 6% (we're heading up that way anyway with recent hikes, and it always pays to be conservative), your PITI payment on each prop (using average tax and insurance costs for our props) is about $600. I plugged in these average numbers, along with our average rent ($995) into our ROI spreadsheet to check on average returns after accounting for all expenses (vacancy, maintenance, PM fee, etc). After all's said and done, your cash flow for each prop is a little more than $220.
Ok, so with $220/month per prop, your total cash flow for the portfolio is more than $2k, which isn't nothing, but you don't really need that income right now. What could you be doing to further you REI goal? Put alllll that cash towards one loan at a time and pay those bad boys off asap. It sounds sort of simple, but when you look at the actual math it's actually a really powerful strategy.
So let's say you pay your $600 min on loans 1-9, leaving you with that $220 in flow left over. You also make the same $600 payment on Loan 10, except you also put all your cash flow toward the principal (you do should make sure the bank knows explicitly that extra payments go toward princ, not future interest, they're tricky sometimes). So you're paying off 9 loans at the normal rate, but your putting a whole extra $2200 toward Loan 10 every month. At that rate, you'll pay off that property by mid 2021. Then you put all your cash flow (which is increased now since Prop 10 no longer carries a P/I payment) towards Loan 9, pay it off by early 2023. As you increase the number of free and clear props you have (which are paid for by your tenants), you pay off each subsequent loan much faster.
Of course, you'd need to ensure your financing doesn't carry any 'early payoff penalties' but in some cases, it may be worth it anyway. If the penalty is 3% of the loan value, you'd pay $2400 on a $80,000 loan to save literally $85,000 in interest payments over the course of a 30 year loan.
(here are the calcs I used if you want to check numbers:
https://www.calculator.net/mortgage-payoff-calcula... (mort payments)
https://www.daveramsey.com/mortgage-payoff-calcula... (payoff)
Again, these are turnkey SFR numbers in Birmingham AL, so everything is subject to change depending on the strategy and the market you choose. But the strategy and its results remain solid regardless. Plus, if you're ok with taking a bit longer to pay off, say, Loans 1-5, you can use this strategy to pay off 6-10 quickly, then pull that equity out and use it to invest in additional doors. Add those loans to the overall strategy and keep plugging away. If props stop performing or you think your money can be put to better use elsewhere, use a 1031 exchange to leapfrog into bigger and better.
The point is that, with the income and credit score you currently have, you can move pretty quickly into a good sized portfolio and then let your tenants buy you those properties at a much faster rate than if you had just one or two doors. You won't get to $1m in cash by next year, but you could easily have $1m in value, and expand to much much more in subsequent years.
Of course, there are definitely tons of different ways to do REI, so I'm speaking only from my personal and professional experience. Other folks on here have had great success with other types of investments, and hopefully some of them will pipe in with their two cents. The truth is that REI is like any other investment - anyone that says they can turn your $10k into $1m in a single year is either lying or selling you an investment with a hefty risk attached to it. You're in a good position. Be clear about your goals outside of just how much money you'd like to have. Take the time to save up enough to make smart moves in stable markets. Be patient enough to wait for the right investments that will help you 1) preserve wealth, 2) generate income (which you can use to pay off debt faster), and 3) offer appreciation potential; in that order.
You have the opportunity to set yourself and your family up for life if you use the assets you have and make smart moves based on mitigating risk where possible and growing your wealth over time, not trying to stretch $10k to buy 4 doors in the slums or jumping into something risky because it offers unbelievable returns (if it's unbelievable, don't believe it). You're in the best place to learn, so keep up the good work!
Best of luck!
Clayton
One thing that is often overlooked by investors is not the equity they have via cash out refi - (my opinion this is not the best choice).. So where is easy money - Line of Credit. here is how I see the LOC power. it is available in one day, you obligate you equity to the bank to secure the LOC, to lower your cost because you store all your extra cash by paying down the LOC as cash becomes available. With that the "suggested 6 months of living money that is not making you much income - put against the LOC. if you need the money, you have the LOC. The huge plus is by paying the LOCdown, you pays less interest and therefore by default you increase you income. In my area commercial LOC's are currently costing 6.25% which is great for the availability of quick cash. Once you buy a property, then if you can get a fixed 30 year loan at a lower rate, do it and your line of credit is then back a full force. I also use the philosophy that when I'm paying my LOC back to zero dollars I do not borrow more money. The reason is I know I have a good ROI and a solid investment but if I take out extra money, even with a lower interest rate, my ROI goes down. I love my high ROI's and so do the banks when I talk with them. in my area St. Louis Missouri the bank loves me even though I have no job but I do have cash flow and solid investments. The interesting thing is that I also employ my "most bank for the buck" theory which says if I have extra cash I want to pay down on a property (the goals is to owe nothing and any property) I run the numbers by comparing the amount it shortened each loan payoff date. That method takes into consideration of time I've owned and and interest rates on the loan. I understand that I will not have quick access to that money I pay aging principal but when they are paid off I have more cash in my pocket and the bank love. I have found that banks just want to make sure you will be pay them off and not default. - I hope that is not a shock. Last but not least, yes by not borrowing every cent the bank will give me, I have lower leverage and more safety incase rents have a down turn. In 2007 the people I hang with did not lower rent and all survived at current rents and some even raised rents. How good is that!
@Account Closed makes some good points! I struggle with paying everything off...mentally ...I started with 2 conventional loans on 4 plex properties, then went all cash and paid them off and bought the next 15 units in cash...then went parabolic and went from 25 to 85 in 1 year...of course back to loans (5+5 year term commercials.)
@Kenneth Kussman One of the things you could do to get you there faster in 2019 is to attend many multifamily events as possible. This is what I did in 2018 and it has allowed me scale quicker.
Have you considered investing in larger multifamily syndication deals?
Caleb, I appreciate your feedback, but why I would want to scale back my target? How would that help me?
I guess I could say I am trying to double my money and finish out 2019 with some appreciation in my one rental and $20,000.00 in cash and if that's what happens I could say I am successful.
To lower my goal would simply be short-sighted and get me nowhere. I am not asking for a formula, or a roadmap, instructions, a step by step guide. My post is simple. What is the one thing I can focus on or do to accelerate my financial achievements in 2019.
Years ago when I started out in the computer industry, service costs for good technicians were extremely hard to control. There were many contractors and service bureaus that charged by the hour. Midsize organizations (500 million dollars range at that time) found it hard to manage large IBM system support costs. I worked for a start-up and the one thing for us was "fixed cost". a monthly fixed cost for support. The company grew extremely fast, to say the least, and now everyone offers fixed monthly pricing for support services.
I am sure many will say there isn't one thing in real-estate. Well maybe there isn't, but that's what I am looking for. One thing I can focus on in 2019 that will accelerate my success. Maybe in real-estate, it's access to money to do deals, I don't know yet.
1) You need to decide whether you want to be active or passive investor. Based on your responses, I'm deducing you may want to be active which equates spending a lot more time on your investments versus just investing funds with someone else and watching them do all the work, just getting the dividends. Again, decide which one suits you best today.
2) Select a niche within the passive or active options. Let's say for example, you decided to invest actively in multifamily.
3) To accelerate your learning curve in multifamily investing, you'd need to hire a mentor or find an experienced investor that will take you under their wing in exchange for whatever you can offer back (free labor for example). If you happen to chose one of the passive niches, then you'd need to learn as much as possible about it prior to taking action.
Best!
there is one thing. Develop your system or work with some one (you may have to pay some money) and then then you can do anything. Relationships is a key, be it bankers or other investors. I have a great banker and lots of other investors - great sounding boards. I do know if they make money and you are not over leveraged you can keep buying and buying and buying. Having them paid off will help you immensely as will a good line n credit. Never listen to the "no" people in your life but if they are in you circle of friends that you trust, "no" can be a good thing if you missed something. If they are not in the business, their "NO" mostl like is not based in facts. Grin
Reverse engineer what you need to do daily in order to achieve your $1,000,000 goal.
@Kenneth Kussman I suggest getting clear on exactly what area of RE you want to invest in. From there you can find events, coaches, webinars, local events, etc to join or be apart of.
@Kenneth Kussman I suggest getting clear on exactly what area of RE you want to invest in. From there you can find events, coaches, webinars, local events, etc to join or be apart of.
I think this is a good idea. Then work backward.
Thanks to everyone for the replies. Really appreciate everyone's input and ideas!!
--- Hoping for a very prosperous 2019 for everyone!!!
@Kenneth Kussman Your biggest asset is your income and the brain that you have which allowed you to make it. I have more than one...but they are in order of importance.
1. Cut your lifestyle. You should be aiming for 60% or higher savings rate to free up cash to plow into investments to get the train running.
2. Decide the path you want to take. Is it SFHs or is it Multifamily etc. I am a buy and hold guy, so this is biased, but your income will make you VERY bankable if you are able to save capital for down payments and that will allow you to scale using the cheapest source of leverage which are bank loans.
3. The method is less important than time in the market and you working to improve the property (like what you did to get the equity in the home you have. SFH, multi, storage it does not matter, what matters is getting a coherent system and understanding how value is created.
NOI= NOI = Total Income – (Vacancy Losses + Total Operating Expenses)
NOI/Value(price)= Cap Rate
Which also means that CHANGE in NOI / Cap Rate gets us INCREASE in value. That is your power.
You make money (capital appreciation which can be taken as INCREASED cash flow OR by taking capital out (refinance, 1031 etc) through increases NOI by either increasing revenue or decreasing expenses (ideally both.) That is the active business side of Buy and Hold. TIME will also increase your revenue as well as rents increase (assuming competent management and a normal area where rents are increasing.)
Cut my lifestyle? Hard but critical.........I agree
@Kenneth Kussman congrats on getting yourself into such a good position. As was mentioned by @Richard Sherman your income is going to be a huge part of getting started, and you should do whatever you can to build up those savings. It is much MUCH easier to go from 5 units to 10 than to get from 1 to 2. Whatever you can do to get your next step to be more a leap is great, even if it takes time. Don't feel like you need to be pulling the trigger on a deal every other day, be patient.
As Richard said, the other main thing you should be focusing on NOW is your strategy. You don't have to do the same type of REI forever, and there will come a time when having a diversified REI portfolio will be a very good idea, but don't muddy the waters by trying to plan for 15 years from now. Have a serious convo with yourself (and your spouse/partner if applicable) about what it is you want out of your investments. You already have the clear goal of $1m in equity by the end of 2019, so you need to work backward from there to determine next steps.
"reaching your $1m cash/equity goal by 2019 is likely going to be a stretch" ...... I agree, it's a stretch, but it's what works for me.
Thanks for your advice!