Newbie looking for guidance - buy and hold strategy

10 Replies

I'm so new to this world and looking forward to the immense growing that will take place.  Here to be a sponge and apologize if this question is silly to most of you experts, but that's why I'm posting, to hopefully learn and absorb from all of you pro's!  This is my first post and just signed up on bigger pockets, inspired to follow this passion of being a rental property investor.  

Anyway, I'm deciding how to enter the game and one of the ideas I have been juggling about is how to initially replace my current salary through cash flow investment, so I could focus on rental property buy and hold investment full-time while also getting some work-life balance back in my life from my 14 - 15 hour day salaried position.  My question revolves around this and I want to use an example to set it up.  

Just to dumb this down a bit, let's say an SFR buy and hold cash flows $300 per month. If I started with 1, I would need to scale to 10 before I could quit my current job and replace my current salary ($3,000 cash flow). I make more than this now, but to comfortably pay the mortgage on my current house, etc. I would need to cash flow $300 on 10 units at least to sustain my current lifestyle. This could take years, given that I am absolutely starting fresh in this game as a whole and have so much to learn. That leads me to my question. Why not just buy a portfolio of 10 SFR buy and holds as the initial investment right out the gate? What are the cons to this? What holds people back from being able to do it? Why wouldn't everyone be doing it if it were that easy? Why would 95% of REI that aren't corporations start small and scale large if it were that simple? The answer for me is "I don't know". It seems like only the bigger fish are able to do this based on money in the bank, but if you're using private lending or hard money lending, etc. why wouldn't someone just go that route to start vs going one by one over the course of multiple years - just go big? I should also mention that I have nowhere near the personal down payment it would take to buy a portfolio of 10 properties, but assume that could all be obtained through the different funding strategies out there? Apologies again if this is the most ridiculous sounding question of all time.

Hi Kyle,

Reasonable question. Rental properties are small businesses. Wouldn't it make sense to buy one, see if you like it, learn from the experience- before jumping in an buying a franchise in an industry that is new to you? You answered the question yourself, not many people have access to the capital to buy 10 at a time. Most who do have experience, which brings connections, and if you do business right, that brings trust, which brings money.

On a pragmatic level, conventional banks have this pesky thing called "debt to income". They want to protect their loan by seeing that you have the income to cover it if (but really when) things go sideways.

I agree with amanda.  Get your feet wet and buy just 1 and see how it goes.  Worse comes to worse and you absolutely hate property management you can always hire that out.  You will not find anyone that will give you a loan to buy 10 properties right away.  You need to prove to them you can do it by already owning properties.   The big fish don't just find some random bank to give them 10 loans they earn it 1 property at at time. Start looking at houses and use the calculator to see the numbers.  It's free to look on the mls. Not every property is going to cash flow.  You can always do some easy calculations in excel if you prefer that.

If you have the skills or willingness to learn you could buy something that needs a little work which will give you some sweat equity.  With that equity you could refinance and cash out, get a home equity loan or loc and use that to buy another property.  There are deals to be had for sure, but you have to find them.

Good advice from @Amanda G. and @Brent Paul

@Kyle Sprague what is your expertise?  What do you do for a living?

Experience is key in becoming a real estate investor and dealing with lenders.  A lender makes loans on many different factors.  Going big is not necessarily a bad thing but there are specific rules to lending on properties (1-4 units).  With the Dodd Frank rules most commercial lenders avoid lending on single properties and would refer you to a residential mortgage lender.  The government wants there to be a line between residential and commercial lending if possible.

You can own up to 10 individual financed properties through a residential lender.  This is Freddie/Fannie guideline.  A residential loan looks at your stability, qualifying income, credit, debt ratio, and loan structure come into play.

Starting in the residential arena is a little easier because if you have stability, good credit, and your debt ratio (45% of income covers your credit debt) then it comes down to the property, appraised value, and down payment (20%-25%).  A residential lender can use a factor of market rents to cover your new purchase.  That means I can qualify you on someone else making the payment on the investment property.  Buying one property is not a bad way to go initially.  Then two and three... Yes, it starts small and feels slow but I have investors that I work with that have their 10 properties in 5-7 years.  We can talk about how if you are interested...

Once you have one or two individual properties, and you can show a commercial lender you have real estate investment experience you could look to "go big" and buy a portfolio.  You still may get push back but what a lender is looking for is if you can qualify for the 10 properties dark.  Dark means can your W2 income cover all of your credit debts plus this investment portfolio you want to buy.  Commercial lenders still look at the rents and coverage but if you are a new borrower they will want more cash down or shorter terms to limit the lenders risk.

Lending terms on commercial lending are different than residential lending.  You usually need 25% down at higher interest rates than residential (maybe 1-1.5% higher) and the amortized payments are cut to 20-25 year terms.  Rates are based on 5 year terms, and most often you will have a 10 year balloon.  You also will not cash flow as well unless you have a lot of equity in the new purchase.

It really comes down to what your experience is, what you do for a living, and what your investment strategy might be.

How did you come to the decision to become a real estate investor?

Your Friend in the Mortgage Business,

Tim

@Amanda G. - I know it sounds basic, but what you're saying makes sense!  When I read Brandon Turners book, there is a section crafted all towards strategies to purchase without necessarily needing a financial institution to front the costs, which is where this becomes confusing and had me wondering to begin with.  Hard lending, partnerships, etc. Appreciate your reply though!

Originally posted by @Brent Paul :

I agree with amanda.  Get your feet wet and buy just 1 and see how it goes.  Worse comes to worse and you absolutely hate property management you can always hire that out.  You will not find anyone that will give you a loan to buy 10 properties right away.  You need to prove to them you can do it by already owning properties.   The big fish don't just find some random bank to give them 10 loans they earn it 1 property at at time. Start looking at houses and use the calculator to see the numbers.  It's free to look on the mls. Not every property is going to cash flow.  You can always do some easy calculations in excel if you prefer that.

If you have the skills or willingness to learn you could buy something that needs a little work which will give you some sweat equity.  With that equity you could refinance and cash out, get a home equity loan or loc and use that to buy another property.  There are deals to be had for sure, but you have to find them.

 Appreciate the insight.  I basically had all the same conclusions and thoughts, but had to ask!

Originally posted by @Kyle Sprague :

Could you acquire one property? If so then one short term rental/vacation rental (airbnb, VRBO, HomeAway) could provide that kind of cashflow if done right.

Originally posted by @Tim Roberts :

Good advice from @Amanda G. and @Brent Paul

@Kyle Sprague what is your expertise?  What do you do for a living?

Experience is key in becoming a real estate investor and dealing with lenders.  A lender makes loans on many different factors.  Going big is not necessarily a bad thing but there are specific rules to lending on properties (1-4 units).  With the Dodd Frank rules most commercial lenders avoid lending on single properties and would refer you to a residential mortgage lender.  The government wants there to be a line between residential and commercial lending if possible.

You can own up to 10 individual financed properties through a residential lender.  This is Freddie/Fannie guideline.  A residential loan looks at your stability, qualifying income, credit, debt ratio, and loan structure come into play.

Starting in the residential arena is a little easier because if you have stability, good credit, and your debt ratio (45% of income covers your credit debt) then it comes down to the property, appraised value, and down payment (20%-25%).  A residential lender can use a factor of market rents to cover your new purchase.  That means I can qualify you on someone else making the payment on the investment property.  Buying one property is not a bad way to go initially.  Then two and three... Yes, it starts small and feels slow but I have investors that I work with that have their 10 properties in 5-7 years.  We can talk about how if you are interested...

Once you have one or two individual properties, and you can show a commercial lender you have real estate investment experience you could look to "go big" and buy a portfolio.  You still may get push back but what a lender is looking for is if you can qualify for the 10 properties dark.  Dark means can your W2 income cover all of your credit debts plus this investment portfolio you want to buy.  Commercial lenders still look at the rents and coverage but if you are a new borrower they will want more cash down or shorter terms to limit the lenders risk.

Lending terms on commercial lending are different than residential lending.  You usually need 25% down at higher interest rates than residential (maybe 1-1.5% higher) and the amortized payments are cut to 20-25 year terms.  Rates are based on 5 year terms, and most often you will have a 10 year balloon.  You also will not cash flow as well unless you have a lot of equity in the new purchase.

It really comes down to what your experience is, what you do for a living, and what your investment strategy might be.

How did you come to the decision to become a real estate investor?

Your Friend in the Mortgage Business,

Tim

Hi Tim,

Thanks for all the wonderful insight and time.  I am definitely new to the investment side and I would even categorize me as new to property management (to an extent).  I'm a hotelier with 17+ years of experience managing properties ranging from 500+ rooms to nearly 2,000 rooms.  I assist in overseeing revenues of $200 million+.  Although a vastly different world, a lot of similarities, but also so much new landscape to learn, as they're entirely different beasts.  

To be honest, I wouldn't be interested in managing the properties, I would outsource that component of it. 

I really appreciate the deep dive, it's that much more eye opening as to how much growing I still have in front of me.  I am a perfectionist and so getting into this venture, I set a goal these first 12-months of just being a sponge, educating myself and immersing myself in this world as much as possible.  Hearing all of the different terminology is scary, but it's also exceptionally educational and inches me closer to my goals and understanding confidently what I'm approaching.

What honestly pushed me the direction to become a future investor is the fact that I've always had an itch at my core.  I landed in hospitality the way life took it's course, but I've always been interested in real-estate and just never pursued it.  People constantly ask me in my personal life why I'm not in it already and reinforce that I would be great at it, but it honestly scares me to death in the same regard.  It's a huge risk if you're not confident in yourself first, which I unfortunately am not. About two months ago, a colleague at work had recommended one of Brandon Turner's books and I'd be lying if I didn't admit it was the catalyst for me to push myself into this world.  I don't think I'm anywhere near ready to make a deal, but want to get practice analyzing deals, understanding the language, the roadblocks, the options to resolution, etc. but that's the short-version of how I ended up here.  I immediately enrolled to be a Pro so I could dive into the webinars and podcasts and history of this site, a worth-while investment for all of the tools I feel will eventually lead me to actualizing this goal.


Anyway, that's where I'm at.  I ponder what I know tend to be basic questions, but it's interesting, as when I search, I'm unable to find answers to what appear to be the obvious sometimes, so thought I would give it a shot with a first post!  I can't thank you enough for breaking all of that information down - very helpful!  Thank you!

-ks

@Kyle, 

I haven't read Brandon's book, but if it is like his blog posts, a lot of what he talks about works best for people who already have experience. Starting the conventional way will make it easier on you- save up the money, buy a decent deal, have someone manage it for you (vet your PM well and manage them) and build from there. Your friends who say you would be great at it see you in the property management role but if that's not what you want to do, ignore that and just put your money in to gain control of some property and learn as you go.

@Kyle Sprague , keep reading and keep asking questions.  Your experience with the hotel industry, being a property manager is a great start.  Feel free to reach out if you have additional questions.  I am looking to read several of Brandon's books to gain a different perspective on buy and hold.  My personal goal is to buy 10 properties with in the next 5 years.

Bigger Pockets gives a lot of insights on being a real estate investor.  Looking forward to connecting with as many other real estate investors as possible to learn from and also be a resource in the lending area.  I am always available to answer questions.

Tim