How did you buy your second property?
Real Estate Agent · Temecula, CA · Member since 2018 · 15 posts · 12 votes
Hello Bigger Pockets Community ;)
I see we have a podcast coming up on February 20, 2019 on regarding this topic but I am curious, how did you purchase your second property?
I have about $50K in equity but Ive been reading this is not a good strategy due to the risk.
What method did you use to get that second or third property?
Love to hear from the community.
Thank you!
David Wagner
Bought a new primary every year for 5 years. Mostly for the better rates, I still put down 20% as I hate PMI.
I was also buying 1 investment property each year with 25% down and 15 year loans (to get better rates) at the same time.
With a spare 2-3 I bought extra during that time I picked up 13 properties in 6 years. Stopped buying and started paying off. I’m down to 6 loans and pay one off with just the rental cash flow every couple years. Probably not the best use of cash to some people but in less that 10 years using about $100k total of my money I picked up $3million in properties flowing $8k/mo now and $15k/mo in 6 years when they’re paid off.
Many people on here are much bigger, and some got that big in a year or 2. But I stopped when I had enough and retired 5 years after starting. You have to decide for yourself when you have enough and enjoy your life and health while you got it. You’ll probably still be around next year but there’s a non-zero chance you won’t.
@Dan Heuschele
$180k/$3 million (equity appreciation) is a bad way to look at it. The leverage was a big part of it. And naturally with lower interest rates you feel safer as you do it. Equity appreciation probably helped tremendously. That’s a lot more consistent and will keep rising. The stock market will likely have way more fluctuations, and chances are he wouldn’t be hitting $3 million off of $100k by having $100k locked up in stocks over that same time period.
Me personally, in 3 yrs I put a certain amount in down payments spread over my properties and now receive 72% of the total down payments back as rent on mine per year. The overall equity is up 200% on my total down payments. My index fund heavy 401k is nowhere near those gains.
Once he has the properties paid off, the leverage is gone. The appreciation will help his overall return but his return will not benefit from leverage as it has been. His return will, over the long term, be smaller than it has been.
Is that 200% return including value adds? If it is just appreciation then you have chosen a great market. With value adds, that is still very good for the last 3 years.
As indicated, I used the S&P just as a reference that was well known and passive. There are better (and worse). My best passive investment we purchased for $300k and the first year received royalty of almost $300k. Of course, the value also went up. Many years later, our royalty checks are down to $30k/year. But 100% passive except needing to file state income tax in an additional state. That is almost as passive as possible as we have used the same tax man through the whole time so he has the process down.
Real estate is easy to use leverage. Not using leverage, especially in high appreciation areas, reduces long term return. Real estate also is not as passive as other investment options. Owning an SFR that returns a couple hundred a month is really just a job and not great paying one especially when taking into account any risk.
@Dan Heuschele
$180k/$3 million (equity appreciation) is a bad way to look at it. The leverage was a big part of it. And naturally with lower interest rates you feel safer as you do it. Equity appreciation probably helped tremendously. That’s a lot more consistent and will keep rising. The stock market will likely have way more fluctuations, and chances are he wouldn’t be hitting $3 million off of $100k by having $100k locked up in stocks over that same time period.
Me personally, in 3 yrs I put a certain amount in down payments spread over my properties and now receive 72% of the total down payments back as rent on mine per year. The overall equity is up 200% on my total down payments. My index fund heavy 401k is nowhere near those gains.
Once he has the properties paid off, the leverage is gone. The appreciation will help his overall return but his return will not benefit from leverage as it has been. His return will, over the long term, be smaller than it has been.
Is that 200% return including value adds? If it is just appreciation then you have chosen a great market. With value adds, that is still very good for the last 3 years.
As indicated, I used the S&P just as a reference that was well known and passive. There are better (and worse). My best passive investment we purchased for $300k and the first year received royalty of almost $300k. Of course, the value also went up. Many years later, our royalty checks are down to $30k/year. But 100% passive except needing to file state income tax in an additional state. That is almost as passive as possible as we have used the same tax man through the whole time so he has the process down.
Real estate is easy to use leverage. Not using leverage, especially in high appreciation areas, reduces long term return. Real estate also is not as passive as other investment options. Owning an SFR that returns a couple hundred a month is really just a job and not great paying one especially when taking into account any risk.
Hi Dan,
You have an impressive portfolio properties:)
I'm a newbie to the RE world but aren't you overlooking all the tax benefits you are benefiting from as well? What are your thoughts?
Thanks for your input.
David
@Dan Heuschele
$180k/$3 million (equity appreciation) is a bad way to look at it. The leverage was a big part of it. And naturally with lower interest rates you feel safer as you do it. Equity appreciation probably helped tremendously. That’s a lot more consistent and will keep rising. The stock market will likely have way more fluctuations, and chances are he wouldn’t be hitting $3 million off of $100k by having $100k locked up in stocks over that same time period.
Me personally, in 3 yrs I put a certain amount in down payments spread over my properties and now receive 72% of the total down payments back as rent on mine per year. The overall equity is up 200% on my total down payments. My index fund heavy 401k is nowhere near those gains.
Once he has the properties paid off, the leverage is gone. The appreciation will help his overall return but his return will not benefit from leverage as it has been. His return will, over the long term, be smaller than it has been.
Is that 200% return including value adds? If it is just appreciation then you have chosen a great market. With value adds, that is still very good for the last 3 years.
As indicated, I used the S&P just as a reference that was well known and passive. There are better (and worse). My best passive investment we purchased for $300k and the first year received royalty of almost $300k. Of course, the value also went up. Many years later, our royalty checks are down to $30k/year. But 100% passive except needing to file state income tax in an additional state. That is almost as passive as possible as we have used the same tax man through the whole time so he has the process down.
Real estate is easy to use leverage. Not using leverage, especially in high appreciation areas, reduces long term return. Real estate also is not as passive as other investment options. Owning an SFR that returns a couple hundred a month is really just a job and not great paying one especially when taking into account any risk.
Hi Dan,
You have an impressive portfolio properties:)
I'm a newbie to the RE world but aren't you overlooking all the tax benefits you are benefiting from as well? What are your thoughts?
Thanks for your input.
David
I think RE is a great investment and the tax benefits are great especially if you or your spouse qualify as an RE professional. If you looked at my profile, you can see that a majority of my RE has had all of my investment extracted to achieve the infinite ROI. though to beat that.
However, I do not consider it passive. My wife qualifies as an RE professional every year (>= 750 hours) and that is with two of our units (STR units) having professional PM and 4 units having my brother live there supposedly so he can address many of the issues in those 4 units.
A return of 6% on $3m is not a bad return but is it a good return on a non-passive investment? Ideally, he will experience some appreciation to help that return but there are many locations in the US where long term RE appreciation does not exceed the inflation rate. What this implies is that, in those locations, the appreciation is not increasing the inflation adjusted value. In those locations, he is getting 6% return and 10 years from now, in inflation adjusted dollars, he will be getting 6% return.
Maybe his RE is in a large growing city where appreciation has exceeded inflation. That would be great for his investment but for many investors that is not the case. They may look at $3m in RE returning $180K as a great return without realizing what rate of return that is or realizing how much time managing RE units can take (there are more passive RE choices like large apartment complexes, syndications, certain commercial properties, notes).
How can you achieve better return? Leverage. If I purchase residential buy n hold RE investment and have 75% LTV, then even modest appreciation of 3% is significant to the investment return. If I can add a value add at purchase such that after the refi my investment is 5% of equity (ideally BRRRR gets all investment out but, without market appreciation assistance, we have been unable to accomplish this) then the modest 3% appreciation is huge (60% return on investment from appreciation and add the cash flow).
I would not consider small unit count (SFR to quad) investment for a projected 6% return on investment. Too much work for that return even if using a PM. Or worded differently, there are more passive investment options with similar rate or return.
Good luck
@David Wagner don't hurry up to use your equity position to purchase a deal that yields you a 10% return. In this high market, only discounted deals & very high yield deals (18% cash on cash is my minimum) are a good call.
Do you have 50k in equity total or 50k that a lender is willing to leverage for you? Of course, a lender won't give you a HELOC or refi out every dollar of your total equity.
Go wholesale some deals :) Stack your chedda and make a move when you've got enough liquidity not to worry about leveraging your home against your rental property unnecessarily.
I have a total of 50k in equity in equity and you're right about leveraging my only rental property to make another deal, there's no since in putting myself in harms way (financially). I have been reading about wholesale deals and I know most of what I've seen involves hard money loans or finding private investors (not too sure if that's 100% correct statement).
Do you have a recommendation on how to approach a wholesale deal?
I appreciate your input and feedback;).
David
Hey David, private money is a pretty easy thing to pull off these days. If it's already rent ready you can even use a portfolio lender for a long term rental loan as well (which looks a lot less at the individual as well). Portfolio lenders definitely charge a higher rate and fees up front in exchange for the easy financing, so it's gonna eat into your cash flow (maybe a little, maybe more than you'd like).
I actually meant go wholesale a few deals so you've got some more cash stacked up! Lol
@David Wagner
Mines a little different from the others here
How I got my second house was I had a couple acres I had purchased several years ago that had a well and septic and old trailer house on it. I sold the trailer house for just a couple thousand it was really worn down, and not something I wanted to mess with. I started searching for houses to be moved. Once I found a house that I liked I bought it the purchase was 1000.00 the people that owned it were wanting to build a new house on the property and were happy to let it go for that. Then I paid a house mover 5000. To move it and a concrete guy 5000. To do a footing and stem wall and then some contractors to tie in electrical, plumbing I’m a hvac contractor so I did that part all in it cost me about 16k outta pocket for the house to get setup and touched up.