I don't believe this difficult, I believe this is very much doable. However, what makes achieving this goal so difficult for most investors? Seeing that "financial freedom" is the HUGE topic now a days. Why is it that some investors achieve this/ANY GOAL towards financial freedom. (Just using this as a number) 50 units=5,000k a month
What makes this difficult?
-not enough capital?
Interested to hear your thoughts BP, I mean REAL ESTATE wise, which I'm sure other people can agree, there are a lot of investors, especially here on BP that makes 5,000k a month look likes crumbs!!
The challenges vary depending on the individual and location. For example, financing is a challenge because lenders in this space are sensitive to buyer experience, liquidity, net worth, track record in the area where the property is located, and management plan, among other things.
Capital is a challenge, because creative financing strategies, while not impossible, are less common. Even if creative financing can be done, capital is still needed for reserves, capital improvements, closing costs, third party due diligence, lender commitment fees, full-year insurance premium for year 1, utility deposits, etc.
Acquisition is a challenge because you have to convince brokers and sellers that you can perform. Brokers get a lot of calls from buyers that aren't "real", and they don't like to waste time. If they know you, no problem, but if they don't know you, expect to be questioned about your background. In many cases, brokers require that you submit a resume along with transaction references with your offer. I always wonder if they ever call those references...
Making mistakes is a challenge, because oversights are amplified on deals of this size. Inexperienced buyers can easily dismiss what they think is a minor problem, to find out that oversight wipes them out after its too late to turn back. For example, I once toured a 100 and something unit property and noticed some areas where ceiling Sheetrock had been patched. I asked about it, and was told it was a water leak repair. After seeing similar patches about a dozen more times, I cornered the maintenance man and asked him what the biggest maintenance challenge was. You guessed it...water leaks. They had no water softener, and very hard water had eroded the thin copper pipes from the inside out causing spontaneous leaks all over the place. This whole complex needed to be re-plumbed. Without seeing warning signs and digging deep, missing this minor detail would destroy a first time investor.
Ok, now that all of that has been said, it is absolutely achievable. If the above challenges don't apply to you, awesome. If they do apply, getting capital, experience, connections, etc by doing smaller deals will get you where you need to be to pull this off.
I toke me 8 years to figure out how to get my first 40 units under my belt. It toke me 90 days of shopping to buy a 74 unit apt building in year 8.
What I am trying to say in that statement is a lot. The reason why it toke me so long to get from zero to 40 was I was working a job and started with zero capital. I also was doing things conventionally and had not the benefit of a place like this forum in my early days. My lack of education and creativity caused my business to grow slowly. I am also very conservative. I also made some monumental mistakes as most people do when they are 1st starting out in this business. Making those mistakes also cost me several years of business profits digging my way out.
I wasnt lucky enough to have a decent mentor until I had been at this 5 years.
I have since then taken many classes in construction and property management and at one point even had my re license a few years. Everyone mind you takes a different path and your personality and creativity will help you in yours.
If i could change anything I would have done 2 things differently.
I would have gotten more education earlier in my investing career and avoided buying some of the deals I did in my 1st few years investing.
I made more money in year 8 then I did in the 1st 7 in my business. The power of having capital and knowledge is the key it changed everything for me.
Its a reasonable goal and I like it. 50 units 5k a month cashflow. Its measurable, and if you break it down to what activity you will do to get each unit and build capital towards it you will have it.
This was a topic that i've been pondering for along time. its like when your first starting out, it feels as if its almost impossible to get the wheels turning, but you guys made a great point when you mentioned KNOWLEDGE, TRACK REACORD, and pretty much a DESIRE to make it work...
AS most have preached, doing smaller deals is what allows you to build the desired track record you need...
Crawl before you walk analogy..
Its not the lack of deals, I can tell you that - at least not for me.
The roadblock you have to getting to 50 houses is the financing and, in turn, the capital.
Not many people can afford to put down 30% of the purchase price plus pay rehab out of pocket for 50 houses. If you figure 70k purchase and 15k in rehab, you'd be talking 36k times 50 which is 1.8 mil. If someone had that kind of money already, they probably wouldn't be looking to get 50 sfh's. :-)
I've got 17 houses right now. For the most part, I've done that with very little of my own money. I was able to start with a HELOC on my home (40k) that I used on my first investment. I then realized how difficult it was to refi with the limited reserves I had left (10k) after putting down 25% plus rehab.
After spending quite a bit of time and finally getting it refi'd, i stuck all that back in reserves and haven't touched it sense. Thats my "bona fides" (yea, I will quote a john wayne movie every once in a while :-) for the banks to do refi's with me. I do end up putting in money here and there on deals. Typically, refi costs or maybe an overrun in rehab costs,etc. 3 to 5k per deal.
But the problem I have is getting loans. Small banks are still very gun shy about doing commercial loans on sfh's. They're convinced investors are the devil and, given the baths some of these banks took, I get it. I'm also out of conventional spots too. And, unfortunately, my wife doesn't qualify for mortgage (self employed).
So, right now, I'm kind of stuck. I'm in process of doing a blanket loan on my conventional loan properties to free up 8 or 9 more spots so I can reset my buying again. If I can get the thing to go through, I'll be able to get up to 25 houses at least.
But I recently had the same deal go through another lender that was going to do a blanket loan plus provide me a sizable line of credit. The loan officer said it was good to go, he vetted thru his VP, and everything was just about set for closing. At the last minute, the executive committee that reviews loans had one VP in the room that refused to budge and they put the kibosh on the loan.
So, to make a long story longer, the reasons why its so hard to get to 50 is financing, financing, and financing. If I could actually find a bank to give me an open LOC and lend me 70% LTV on my deals (appraisal value), I could have gotten to 50 somewhere around this year (10 houses a year instead of 3).
But since that simply doesn't exist for 99.9% of the population, I'm more than happy with the pace I've been able to maintain - even moreso given how little capital I had to start with.
Lets not say lose everything. That implies the business going under and foreclosures, et al. Quite honestly, I don't see any way that I could build up to where I'm at now if I were to get hit with a bunch of foreclosures. Even a late payment on my credit would be tough to continue adding properties - literally.
But if I were to sell everything and donate the money to charity (how's that for scenarios), could I get back to where I'm at now? Could I do it faster?
I would say I could definitely get back to where I'm at now. I'm much more comfortable with the process and the first 10 houses would be a piece a cake. After that, I know the routine for getting local banks to give me commercial loans on sfh. Its a ton of work but doable.
Unfortunately, I no longer have my aunt to act as a private money source so that cuts down how fast I can go. I'm guessing, if I had to start over again, I would only be able to do 2 a year given the financing constraint.
So, yes, I could rebuild to where I'm at fairly easily and would probably have a MUCH NICER portfolio overall (i.e. better product, better areas). But I think it would actually take me longer to do given the loss of one of my financing legs that I had during this run.
IF I could have that back, then I could probably add 4 or 5 houses a year instead of the 3 that I've been doing over the last 5 years.
Knowing what I know now, I don't think anybody thats done over 10 deals wouldn't be able to at least get back to where they were provided their financial condition was identical. Its strictly a formula that I think anyone can pick up on - and how much effort they're willing to put in to do it again.
Mike H ... regarding your loans after the first 10, are you getting commercial loans using the strength of your assets and income or via a strong W2? I went conventional for houses 1-4 and a portfolio lender 5-10. Portfolio lender cut me off after that and the only reason I was even able to do 5-10 was due to having a strong job and w-2. Now I'm investing full time and no w-2 = no financing, at least traditional. I've found investment groups that will do 5 year balloon refis at 9-10% 50% LTV but the closing costs are so outrageous that I chose not to go that route. So all properties after 10 have been more difficult to acquire, I've had to change my profile to lower end cash flow property (from mid range quality cash flow) and add 1-3 flips per year to help finance the growth in rentals.
Access to financing is certainly the limiting factor. If I still had access to the 75% LTV traditional financing I could grow very fast. Without that I've had to adjust. Someone once said on one of these forums or blogs ... if the government really wanted to clear out the foreclosures they would simply make access to investor loans available past an arbitrary the number. I understand your statement about the banks being burned by investors but this is a different time. Investors are putting large downpayments on properties that actually cash flow. Seems a much safer bet than hoping that first time FHA buyers with no cash in the bank or significant downpayment don't eventually foreclose. All the FHA, VA, Homepath buyers I've seen have been one broken AC or job loss away from losing their home.
Yea. I do have good w-2 income. I actually switched jobs about 3 months ago and was doing corp to corp as a contractor. Huge salary bump but I was having my corp pay myself a good w-2 salary. I thought that would avoid the "self employment" issue. No such luck. Just found out that even though I'm getting w-2 income, I'm still going to be counted as self employed since I'm the sole owner of the corp.
I am now in the process of having my consulting firm switch me over to w-2. Which means I will now have to pay higher taxes on about 40k of my income. Its ridiculous.
But, yes, I'm actually at 8 conventional loans now and the rest commercial. But I am in the process of refinancing a bunch of my propperties - including ALL of my conventional loans - into a blanket loan.
I'm cherry picking the houses (except for all the conv loans have to go in) so that my payments end up being about the same or a little bit lower even. The real value is that I will be able to free up those 9 spots again (can't free up my primary residence obviously).
Have you tried going to local banks? They won't count your self employment income at all? They should be able to add back depreciation from your real estate so it would be enough to qualify.
They're higher than conventional but no where near those terms you were quoting from that other group. 50% LTV? 10%? I'd keep banging on doors out there until you can find a local bank that understands real estate a little more. They should be able to do a lot closer to conventional terms than that.
I just did one back in August on a SFH.
I bought the house at the end of June with a private money loan
that I rolled the purch and rehab cost into. I refi'd out of
the private money loan just over 2 months later.
LTV was about 65%, 5.5% interest, 20 year amort, 5 yr balloon.
The only gotcha was after I refi'd that to free up a financing spot, my aunt got a 90 notice from the bank where she works and decided to refi out of her heloc that was using to lend to me (she was getting it for 2% and lending it to me for 7% plus 3 pts) and I lost my spot anyway! It was a huge blow. But given she is so close to retirement, she wanted to lock in the fixed rate long term as the HELOC was about to reset and she was afraid she wouldn't qualify for the refi if she was unemployed.
Kicker is the stupid bank kept her anyway and now that money is all tied up. No matter where I look, the banks always seem to be gumming up the works for me. :-)
I hear you Mike H ... my situation is similar. I still do some consulting on the side but am lucky enough where my rental income has permanently been able to displace a high W2 corporate income. This was the goal all along and we went "all in" to high cash flow SFRs in AZ 2009-2012. Now that I have made it where I no longer have to be a wage slave the lack of W2 has been a hindrance. You are right, there are banks that would work with me but again without the W2 even the strength of my balance sheet, paid off properties and documented rental income is not enough. This isn't the forum to go into the absurdities of banks considering corporate income superior to passive income so I won't go there.
I have yet to find a lender willing to do a blanket loan other than the one at 50% LTV. They call it the "not so hard" loan and its a large insurance co that lends for itself. I calculated roughly 4 points after all of there inspection, appraisal, documentation, etc fees. Just wasn't worth it.
I don't mind slowing down purchasing right now. I buy good deals that don't necessarily cash flow and flip those using the proceeds to by 2% plus rentals.
I have friends that are asset and cash wealthy that don't need to work but went back to the corporate world just for the W2 and the opportunity to get 10 financed loan.
On a side note - I have heard that Citibank has a program that allows up to 20 rentals. A friend of mine is testing them for number 11 so we will see. Again though W2 is the key component.
It looks like you guys are concentrated on SFH and the financing is not so great on those after a certain number. Would there be anything to liquidating the properties you have to put up the equity for small apartment buildings? Have you thought of that and ruled it out? What are your plans to push forward?
We do multifamily as well, two projects 42 units total, class C. Those were market bottom turnaround deals circa 2010-2011 in a different market and required a ton of work and time. All in after the turnaround we are generating nearly 20% COC on those. Unfortunately those deals cannot be replicated in my market no matter how hard I try and I'm not looking out of state. I view multifamily as essential to juicing the return of a portfolio but I love the flexibility and upside of quality SFRs. I've considering moving into a higher class and larger number of units but the returns simply are not there. Why trade stable cash flowing SFRs into lower ROI multi? I've yet to see anything class B or above in AZ offered at real caps over 8%. Maybe on the pro forma they show 8%+ plus but when you dig in its closer to 5%. To me its not the number of units you own to reach your goals. Its all about maximizing the return on each and every holding thereby needing less property to reach your goal.
Thanks for your reply Serge. I hope my questions didn't come across as rude. From the posts of yours that I have read, you appear to be very astute. I am far from hitting walls at my stage of investing as I am only looking to get my second mortgage right now. But I am thinking about the future and possible multi-family and just wanted to see what makes one path different from another.
@Serge S. - great post. if you dont mind me asking, i dont fully understand, but why does w2 income play such a moajor role in financing? or why is it much harder without w2...
@Geoffrey Murphy The reason W2 income is important on a turn-around deal is because such a deal does not and can not guarantee re-payment, and as such the lender has to rely on earned income. When you portfolio is very large, and has a track record of stability, then the lender can bridge the portfolio income at which point W2 becomes less important.
Even still, a turn-around project, at its’ very essence, is a calculated gamble for all. Why? Because the initial income is unstable, which is why W2 income is big.
@Serge S. I respectfully disagree about needing less property to accomplish CF goals. Obviously we want to maximize each revenue stream. But, if you were to go into a battle, would you rather have 30 soldiers on your side or 300? The answer is intuitive – income diversification is the primary reason to have more not less property. A loss of one soldier if you only have 30 to begin with constitutes a much bigger problem than a loss of 10 soldiers if you have 300 at the start of battle.
Also, a larger asset base value will necessarily lend to higher equity returns over time.
And finally, with the money being as inexpensive as it is, this is a great time for leveraging, which automatically increases cash on cash returns.
@Ben Leybovich - that makes much more sense. So just like you said, it really depends on your track record, asset holdings ect....
Thanks for the clarity ben. I was confused at first but i figured a guy that owns, lets say a guy that owns 15 properties, wouldnt that be enough to qualify? but i guess it does depend on CF, Debt, Leverage ect...
@Ben L- how are things in your mrket? is this a fair enough number untis to accumalate in your market?
@Geoffrey Murphy Naturally, the number of units you own is a function of your goals as an investor. I have 28 units and I am nowhere near done. For my life to ultimately look and function the way I need it to, I will have to own 120 units minimum. This will take time, however, my experience has been that progress tends to be exponential. It is hard to go from 1 unit to 4; and from 4 to 8; but it gets easier in a lot of ways.
Timely to mention is the fact that I specialize in 100% financing, or as close to it as I can get. This demands me to be very selective with what projects I get into.
Having said all this – even at 28 units I am one of the top 10 players in my town. My friend, the biggest player around here, owns around 650. There are a 3 of guys at 80 to 120. There are few people with about 50, and then there is me. Thus, 15 is a very achievable number indeed.
In fact, I was just approached by a realtor colleague of mine who knows that I am a buyer. He showed me a list of about 12 – 15 duplexes that are being sold as a package. Solid investments - I own several just like those. However, I am out as a buyer since I just closed on a 10-unit on Monday and need some time to clean house – 1 bird at a time. But, somebody will be buying a lot of income. PM me if you want to know more…
@Ben Leybovich I do agree with you that more is certainly better. My post was primarily in response to the original poster talking about getting to 50 units. I think its more important to figure out the income you seek and get there with the minimum number of units rather than maximum. Number of units are less important than the return of the total portfolio. I would rather have a portfolio of 25 homes turning 18% than 50 turning 9%. Less management, less headache, etc. That being said, if financing was limitless I would absolutely maximize my holdings and probably be a lot less picky. I'm impressed you have been able to build such a portfolio with no money down. This is no easy task.
Funny thing here is that this magic number will keep moving. I remember when I started it was all about getting to 4 and having my personal mortgage paid off. Then it went to 10 and very quickly to 50. Now I don't even put a number on it, I'm just a deal junky and couldn't tell you my total units without stopping and thinking. Its absolutely true that #1-4 is the hardest. Cross that hurdle and your halfway there!
Brian Hoyt the debate between MF and SFR has been played out and I'm sure you have read the debates. I personally fall on the side of SFR investing but own both and have no issues with Multi. I'm just not a blind believer that MF is inherently a better investment. In fact I think MF is much harder in just about every aspect ... finding the right complex, managing, capex, cash flow, etc.
@Geoffrey Murphy regarding the question of W2. Ben is correct regarding financing for turn around apt complex financing. Aside from private money, financing is nearly impossible here even with a strong W2. W2 (corporate job) for whatever reason is the gold standard for banks. If you have high and consistent income most banks will be willing to over look other issues. Funny thing is that I am financially more stable than I ever was with the corporate job yet none of that seems to matter. Good luck trying to explain that to a conventional banker.
@Serge S. - that makes a lot of sense now. So in your market, depending on multiple things, to make 5k a month, would you say you need 50 units, or less? i know there are a lot of variables here.
The hardest part is not accepting no for an answer. You have to keep striving and refusing to be stagnant.
Capital is definitely the hardest part. You can have all the guidance in the world or plan anything but it won't come together without capital and being creative.
I completely agree -- if you don't have a pile of money sitting around it seems as though you can't get a loan, no matter how good your credit is. But if you had a pile of money, you wouldn't need the loan.
In my market today, $5k in net income would require approx $8-9k gross rents assuming you self manage. You could find C class SFRs at an average buy in of $50k that command an average of $800 rents. Mind you it wouldn't be easy in metro PHX, you would have to compete and know how to buy. This is cash on cash so 10 of these houses using $800k in capital will buy you your $5k monthly, really not the greatest return. If I'm sitting on $800k I'm not sure I would deploy it today on 10 C class SFRs for that return.
Alternatively my 32 unit MF grosses $10k and nets around $5k. Today its probably worth the same $800k. Back in 2009-2011 you could have found ways to get those same 8 houses for $400k rather than today's $800k. That 32 unit that is performing today and worth $800k could have been had for $200k. Timing matters.
@Serge S. - thanks for the explanation in detail, that really what i needed. One thing i can point out is that your market seems to be a great place to deploy capital?
I agree on a couple points by Serge. For me, going to multfamily doesn't work for a number of reasons.
1) I don't have the capital it takes to get into something that includes the management and I don't have the time to self-manage 10-12 unit deals.
2) The CAP rate on multifamily on the smaller deals just doesn't make sense to me. I can't see paying 50k a door to get rents at $750 a month when I can buy houses for 80k (all in) and get rents between 1200 to1400. Even moreso given the turnover on the homes is so much less than the turnover on apt style units - based on what I've read/heard.
3) Leverage. Its hard to have better leverage than 0 to 7% down which is how I'm acquiring my sfh's. Most deals I'm all in at anywhere from 0 to 5 or 6k of my own money (I use a hard money lender and was using a private lender that rolled all the costs into the loan).
I don't think I could put in 100k of my own money and make 10% cash on cash. Not when I'm effectively making 100% cash on cash on my sfh's.
And, yes, the loans are an issue no matter where you look.
RE: Citibank to 20
Can you please send an update on where they found out about this program and possibly pass a contact along? I know you said it hasn't gone through but I'm used to loans telling me its ok and then pulling it off the table at the very end so this would be nothing new.
I'd at least like to give them a try.
If you could pass along your buddy's banker info, it would be greatly appreciated!
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