Strategy to Prevent Over-Leveraging

[Devin Hightower]

Hello everyone!

I currently have one rental property in addition to my primary residence. I'm trying to be deliberate with my efforts to acquire rental properties without exposing myself to more risk than I can handle should the market turn. The idea I'm thinking of pursuing is to purchase two more rental properties, giving me 4 total mortgages, then rolling all the cash flow plus money from my job into one property at a time to pay them off. Each time I pay a property off, I'll buy a new one, giving me 4 mortgages at any given time, but snowballing the cashflow to increase the rate at which I'm paying them off. I would also like to flip houses in between acquiring properties, using the profits to pay off properties faster. My two goals are to get $12k per month in cash flow, then to build to $20 million in assets while protecting myself from a market crash. My wife and I both have decent paying jobs at this point, so this is really a long term plan that I expect to start slow, and I don't plan on surviving off the cash flow in the near future, just reinvesting it. Thoughts on this strategy?

[John Warren]

@Devin Hightower I was at a local land lord association last year in Berwyn, IL, and one of the local guys was kind enough to talk about how he lost $44,000,000 during the crash. The main take away for me was that he cross collateralized a lot of his good, cash flowing apartment buildings to buy more. He ended up speculating on a huge piece of land that he wanted to develop into single family homes. He had the right idea, but was 10 years too early. He ended up losing all of his properties, his home, and he almost lost his truck. 

The other take away I got from the story was that the banks were not willing to help this guy. He had done business for decades, but when it all came crashing down they went ahead and foreclosed on all his buildings. 

The last thing I took away was that you always need cash reserves. It is important in multifamily in particular to have excellent cash reserves for each property. This will allow you to weather the bad times.