Last week, I closed on a triplex and my portfolio hit 25 units, and I wanted to share what I've learned in the hope that it may help some investors who are starting out (both young and old). This deal:
Purchase Price: $162,500
Rehab required: $10,000
Monthly rents: $2,800
My monthly cash flow will likely total ~$350, depending on what I ultimately get for rents. I'll probably leave about $10,000 in the building after I refinance, which is more than I'd like but still makes it a good deal (for my criteria).
Anyways, what I've learned:
- Start networking with private money lenders immediately. Even if you plan to use conventional financing for your first deal or two, you'll never be able to effectively scale and consistently close on great deals if you don't use private financing. In today's market, you just can't consistently compete (if you are looking to do a number of deals in a short amount of time) using traditional financing. When meeting with private lenders, bring sample deals that would be an example of what you'd pitch them so you can truly evaluate what caliber of deals you will need to find to secure financing.
- Start focusing on equity, not cash flow. Of course, it is essential to analyze cash flow when evaluating a potential buy and hold investment, however, I've found that the best investors are the ones who focus on leaving minimal cash in deals (and buying with equity on the front end). Stop focusing on dollars a month in cash flow, and start worrying about how much below market you are buying the property at and what your cash on cash return will be (as a %). I own properties where I make $50/door in cash flow, some people may laugh at that, but I have no money in the deal (infinite return).
- Despite the goal of not leaving cash in deals, you'll have a hard time responsibly closing on deals if you don't have cash in the bank (closing costs, inspections during due diligence, paying contractors after you close, dealing with unforeseen problems). With that being said, if you truly don't have money in the bank, focus on increasing your income before trying to figure out how to buy real estate with truly no money down.
- Always buy with your exit in mind (even if you plan to hold long term). I recently had difficulty selling the first property I bought because it had an undersized septic tank and a dug well servicing the building (not a drilled well). As a result, it didn't qualify for FHA/VA/conventional financing and my buyer pool shrunk significantly. While I ended up finding a buyer, my selling price took a serious hit (learning experience!).
- Focus on getting in the game. Don't feel the need to hit a home run on your first deal.. a single or double is better than sitting on the sidelines. If you're young and can't get conventional financing, use commercial financing. Most of my 2-4 unit properties are financed with commercial loans because I won't qualify for a traditional 30 year, fixed-rate mortgages.. sure the terms are worse but it's better than not owning property.
Best of luck to everyone!
Congrats on your success but the most important part is being in a market where you can find the deals.
Here in South Florida these numbers and deals don't exist so your market definitely plays the biggest factor.
@Brian Garrett that does help, although my market is very competitive right now and its extremely difficult finding below market deals on the MLS.. most everything I have bought is off market (direct mail, Craigslist, relationships). I'm sure if rentals didn't pencil out here I'd be looking in other markets, changing strategies, etc.
@Axel Ragnarsson Congrats on the success, that's huge. I've just started to focus on acquiring rentals and closed my first deal in September with the same thought process. Unique prospecting, purchased well below market, rehabbed and hitting the market for rent next week. I'm in the deal entirely for under 65k and will have about 30k in equity aside from the cash flow. It should rent for 9-950/mth. This was a cash purchase but once I refinance I should have all of my investment back and nearly 200/mth cash flow. My plan is patience to find the right deal and not rush into just any cash flowing unit. You make your money when you buy, not when you sell!
@Axel Ragnarsson can you share any add'l insights on private money lenders? Even as a new investor, I recognize the need to have a network of private money I can access for more/larger deals, but a) I have to identify them and get on their radar, b) i have to convince them that I can execute without a track record, c) I have to get some level of commitment before I have a deal in hand. Any tips?
@Axel Ragnarsson , thanks for the post and congratulations on your success!
@Ryan Robbins Exactly, it's important to focus on equity just as much (if not more so) than cash flow!
@David Whitaker When I started, I asked almost everyone in my circle if they knew of someone who worked in real estate, as a mortgage broker, or was an investor in the area. I then asked all of these people if they could introduce me to someone who was a private lender. This gave me a number of leads and lenders to work with. Bring them all sample deals and pitch them (ask them if they would be interested in funding a deal that meets this criteria). When I had no track record, I brought bids from reputable contractors in the area, detailed repair estimates, and talked about how the team around me had a lot of experience. The sample deal usually gets you soft commitments from investors, that way when you find one you can feel comfortable acting on it.
@Ehsan Rishat Thank you!
Sorry to be a wet blanket, but you're equity stripping everything, leaving your cash flow dangerously thin on already tiny properties at this point in time of the real estate cycle when rates are increasing and we've seen a 10 year run? I hope you're LTVs are 60-70% on those refis and not 75-80%. What is your plan when commercial loans re-set in 5 years and the rates are 7%? Your $50 or even $350 a month cash flows will go south in a damn hurry.
I'm going to venture a guess you have little to no real reserves (credit is not a reserve) and that you haven't factored in what happens if rental markets get soft or drop.
What could go wrong being mortgaged to death?
good stuff! Congrats on the success
@Peter T. I completely understand this viewpoint. This is certainly a concern and I've been sure to get commercial notes with 10 year fixed rates, which gives me some peace of mind. I do keep reserves of $2,500/unit right now, what do you see as appropriate? I'm also very conservative with my numbers (8% vacancy, 10% maintenance, 10% capex, 9% property management, when I analyze).
Fantastic! Congratulations on your success!! Keep it up!
kudos to you my man. Each and every REI MeetUp that I have been to, some newbies, some multi-millionaires, there has been a solid theme. Some deals, most, in fact, require mass leveraging. Now, that is not going to apply to a letter mailer that you might get highly favorable terms on, but it DOES apply to massive projects, 10+ units, etc and leveraging is currently working. What is your 5 year plan?
Congrats on your success!!!
Congratulations on such success at such a young age. That's fantastic. I wish I had started on this 30 years sooner!
could you not before purchase or next purchase if has septic do a plan check for at least size of septic. Based om # of users
As for as water. Not sure how they would dighole instead of drilled. Can self drill to certain depth after that have to hire professional. I was buildinf inspector if you know something idont please tell me
Like your analagy for beginers better to hit adouble than not swing at 3 strike or foul it off
Thanks for sharing @Axel Ragnarsson
!st - Congratulations on a great buy! Secondly, I love that you shared your wisdom gained. I had never heard the "Start focusing on equity, not cash flow" before and at first it took me a bit to understand. Yes, I would agree that if the market tanks 50% and you have good equity you'll come out the other end just fine. I would still not ignore my cash flow because without it you may turn negative in a bad market as we saw in 2008-09.
@Axel Ragnarsson Congratulations on your success and at 24?? awesome stuff. Im 26 and currently working
on debt reduction with one rental under my belt lol. anyways I do have a question for you though. How are
you finding your multifamily properties? silly question but 10K i'm assuming is just paint and carpet if that...
so thats a little under 50k equity?? how you finding deals like that?
Hi Alex, congrats on your success.
I am in a similar boat as you. I have 22 units right now that I have picked up over the last several years, plus a fair number of flips and wholesales.
I agree on equity point. I agree with the other Peter that cash flow cannot be ignored. I always strive to hit at least 2 of 3 metrics: equity, cash flow, appreciation. I never count on the 3rd in my market, so I make sure I get the first two. With only one you break even, and with none you lose!
I have a question on your refi to you and the rest of the chain, what kind of lenders have you been able to work with, and what kind of terms? Do they insist on you signing a personal guarantee? Have you been able to find lenders who lend without a PG? At my stage, with my portfolio, I want to grow more and am not keen on doing PG going forward. Has anyone found national commercial lenders useful (and economically viable)?
Congrats on your success and at such a young age. Kudos! But sounds like you live in a low cost of living area.
Move to the San Francisco Bay Area and see if you an replicate your results. Can you get a loan for $1-2MM? Do you have a mountain of cash to perform even the most minor of renovations. Even the immigrant central Americans (El Salvadoreans/Guatemalans) are buying new cars here they make so much cash!!
No way no how to get a good multi deal here in San Francisco. That ship sailed in the 90s (or if you were super lucky and bribed your way into a deal 2009-2010).
But, I can surf in the morning, mountain bike in the afternoon, and ski at night. Pros and cons I suppose.
Maybe if there's another downturn I can find a couple multis - currently sitting on a pile of cash. But for now I'm content running my professional services business which nets me close to 7 figures for a 3-day week. Maybe RE isn't for me (despite Bigger Pockets clickbait emails saying it's so so easy).
Congrats and keep your momentum!
Congratulations on the success! Thank you for sharing your trials and tribulations.
Congrats on your success!
Congrats and thanks for sharing your wisdom and experience!
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