How do you scale your business so quick?

99 Replies

How do the pros acquire so many properties in such a short amount of time? I listen to the BP podcasts and the guests are always talking about growing 5-10+ units a year. I bought my first house in 2013, and am looking for an investment property in the ATL area. I am worried though that after I finance this second property I will have such a high debt/income ratio that I’ll be stuck paying cash for any additional units, and that I may no longer have cash on hand due to any rehabs. How do you guys grow so quickly?

Thank you, all advice is appreciated!

-Stephen C.

I'm new as well and I will run into the same issues you are talking about. I bought a duplex that needed substantial work. I'm currently fixing it up and will sell it in a couple years. It will be my seed money for future units. It will be slow in the beginning, but that is one way to address your concerns.

I've purchased 3 new rentals in the last month as well as several retail flips and a few wholesale properties. For me, it was a matter of discovering what is the one thing that makes me the most money in my business. I focus on that and outsource or put off everything else. Just do that one thing that brings the paydays and forget the rest. Being busy and working hard doesn't mean you're making any progress toward your goals.

Account Closed , I think the question is "how do you buy so many properties so fast and not run into debt/income ratio problems or limits on how many you can get financed?" I think many people would be interested in your answer to that!

I've went from 4 units (3 properties) to 28 units (14 properties) over the past 3 years using seller financing. I typically buy on land contract with very little money down and 5 year balloons. I have a great working relationship with a small local bank that loans for their own note portfolio. I refinanced my first land contract last year, which was a 3 unit. My banker is presenting the refi of 5 duplexes this coming week. The new loan will be a commercial blanket loan, 20 year amortization, 5/1 arm starting at 4.750% and the LTV will be at 80-85% LTV.

I'll still have a couple of single family houses, 2 duplexes, and 5 unit complex on contract needing refi in the next 4 years. I see no issues getting it done. I make $14/hr at my job....

@Stephen Collins The answer to your question is twofold

1- If you are investing for rental income, you need to make sure the properties you purchase have high cap rates (high net income in relation to purchase price) so that the note payment is fully covered with 75-80% of the scheduled rental income

2- If you are rehabbing to sell you need substantial equity capital as your operation becomes bigger. This necessitates either reinvestment of profits back into the business and/or some type of equity partner - either limited or active.

@Brandon Hicks

I have been reading up on land contracts as an option to puchase investment properties. My question is, are there instances where the buyer has made payments for some time and then the contract is not honored?

@ Joseph Grullon

From my experiences as an ex-realtor and as an active investor I've seen/heard about many LC's falling apart. Normally it's for non-payment and normally they are deals where the buyer is buying the property for a primary residence. It's my opinion that land contracts are more suitable for the sale of business and income property. Not for primary residences. You're just starting off on the wrong foot with a buyer, who in most instances cant get financing to begin with. The barrier for entry into a primary residence is far lower than with investments. Downs are 3.5% or less in many cases vs. 20-25% or more in some cases with income property. So it's normally not a credit thing with investors, it just makes sense to get in for as little as possible to be able to scale your business.

When you buy an investment on contract most of the time you're buying from another investor already used to getting monthly payments and wants to be done with the management. While I do have good relationships with all my sellers, I safeguard myself by depositing my payments directly in their bank accounts. It's all spelled out in the contract and creates a nice paper trail and proof of payment. If I had a rogue seller close an account and refuse to give me another account number I would contact my attorney and have him hold my payments for the seller until it would be resolved. I don't anticipate something like that ever happening but I think it would work out ok if it did.

As I mentioned before, I do have a great relationship with a small local bank and am confident that I will be able to get financing in place prior to the balloon being due. If I can't for some reason I believe that most, if not all, my sellers would grant an extension. After all, they sold the properties because they no longer wanted to deal with management. Along those lines, I just contacted 2 of my sellers on 2 of the duplexes I'm getting ready to refi to let them know they would be getting their cash soon. Neither of them were excited at that.

I'm going to repeat that.....Neither of them were excited at the thought of getting their money back! One of them even offered to extend it out. I still want to proceed with the refi because the new loan will not only simplify my bookkeeping, it will increase my cashflow by $850'ish a month. This is due to 3 of the dups being at 7.5% interest on a 20 year amm and the other 2 being at 5% on 12 year amms and the new loan being a 20 year amm at 4.750% on a 5/1 arm.

I'm planning on presenting the idea of them re-loaning me some of their proceeds to either flip a houses or use as a down payment(s) on other deal(s). That will depend on their comfort level and length of time they would want to lend it. I would give them a 2nd mortgage on my package of 5 duplexes for security.

Not only does the balloon payment create a tax burden for some of these sellers, but if they have a decent chunk of un-needed cash it's going to just rot in the bank. So it's possible that if you have trouble refinancing you may be able to get your sellers to extend the balloon out. Or you may be able to re-borrow from one of the sellers you paid off to get the LTV down to where the bank wants it on a different property or even pay the whole note off.

I was hesitant to buy on contract for a long time, nowadays it's my go-to!!

I've always figured rapid growth in the buy and hold model requires a flipping model as well. Mathematically one is probably going to have to buy 5 house to retain one and that one will be free and clear Four properties sold should support the capture costs and the one held unit.

Run that model and I bet by the time one owns 10 free and clears they will have all the underlying resources they need. Should only take a year.

@Michael Q.

I could definitely see how flipping would work to create chucks of usable capital. It all depends on how much time/resources one has to start with.

I have had very little time over the past few years and I've added 24 units with around $20k TOTAL out of pocket. The majority of that was from cash flow from the existing portfolio.

IMO it takes cash or access to cash to flip, whereas you really don't need much to build a buy and hold portfolio using seller financing.

I live in a smaller town of around 10,000 people. I've often stated that in a city of 100k plus I could add 100 units a year using my model!

Sample deal......

I added a 5 unit complex last October. After closing costs (no cash down payment) and paying fall taxes, 2 payments to the seller, starting the insurance up, doing repairs/clean-up and some other normal type expenses I had just under $2449 of my capital "stuck" in that deal at years end. As of today, after all my income/expenses including prorating property taxes and insurance through the end of the month I have a positive cash flow of $2316.57. So after 7 months of ownership I've got less than $150 invested in this property. Barring some large expense I'll have all my capital out in the next month or two.

Here's some details on my process. The 1st quoted paragraph is straight from my letter of intent pertaining to the down payment.

"The down payment is to be made up entirely from credits for prorated property taxes, prorated rent for the month closing takes place and security deposits that you have collected from the current tenant(s). The land contract note amount will be the balance owed after the above credits have been subtracted."


The rest of this was cut from a private message I wrote one night REALLY late so it may be a bit rambling but it lays out the step-by-step for calculating the deal with no money used for the down payment.

"It's one of those things that is really simple yet most people look at it and over-complicate it. Essentially you come to an agreement with the seller that is zero down as far as cash goes. You agree on a amortization period, interest rate and balloon period. Im going to assume you understand how the proration of property taxes works when you purchase a property. You get a credit from the seller up the date of closing for any unpaid taxes and prorated for the current year up to the date of closing. Then if the property is rented and there are tenant security deposits being held by the seller he has to transfer them to you as the new owner. I like to close on the 8th of the month so that all my payments are due on the same day. So by then the seller has already collected rent for the month of closing. They give me a credit for 23 days of that rent. These credit are all on paper. No cash changing hands....just numbers. Add these 3 totals together and you have your down payment. You take that total and subtract it from the purchase price to get your land contract note balance. You take the note balance and stick it in a mortgage calculator with your other agreed upon terms to calculate your payment. Ive done my last 3 deals like this and when I get my land contract from my attorney the down payment, land contract note balance and monthly payment are left blank in the word doc. The lady I deal with at the title company fills it in later once we have an official closing date and figure out the pro-rations. Ive kept her pretty confused over the years since she tends to over-complicate my HUD's but she seems to be catching on. Let me know if you have any questions. Ive been able to do these deals because Ive done what I said I would do on other deals. When I write a LOI on a property I give the seller a list of other sellers Ive bought from on contract with their phone numbers. Its better than any credit report when they call them up and hear that I pay and I take care of the property."

@Brandon Hicks ,

Your business model is extremely intriguing and it sounds like you are having a ton of success with it.

How do you typically find the seller financed deals you do? Direct mail, networking, other?

Thanks

Lance

@Lance H.

My 1st 3 LC deals were off the MLS. A 3 unit, a package of 3 duplexes and single duplex. These deals required some cash down.

The 3 unit.....was around $5k cash down....mainly to pay the realtor.

The package of 3 dups.....roughly $4.5-5k....plus a $15k 2nd mortgage note on 3 other properties I already had financed with a bank. Seller paid half of commission at closing (they had to bring a little cash to cover) and paid the balance 6 months later.

The single dup....around $2.5k in cash. The seller had to bring cash to cover commission.

My last 6 deals were all straight with the seller on unlisted properties. A few came from direct mail, the 5 unit was initiated from me sending the seller a facebook message and one of the houses was owned by the lady I bought the package of 3 dups from. That one was $2000 down but $1800 and change was credits.

My last 3 of the last 6 deals were the 5 unit and 2 duplexes owned by 2 different sellers on adjoining lots. All no cash down using the method I explained in earlier posts.

I've certainly grown faster and with better quality properties than I first imagined I would when I set out to expand. I'm not sure what this year will bring. I may hit another spurt the 2nd half!

@Jean Bolger

It really is a great way to get into deals. I'm looking forward to doing my 1st private money note once I refi a couple sellers out. I'm not sure if I'll use it for flipping or as a DP on a bigger deal that I may not have done no cash down! I really like the idea of flipping a few houses over the next 2-3 years so I'm leaning towards that path.

I see me going through different phases and using different techniques as my portfolio/equity grows.

@Brandon Hicks

That is pretty amazing! How did you bring up the idea of seller financing to the sellers, especially off the MLS? Were they already marketing them that way?

Thanks again

The MLS deals were not being marketed for seller financing. We just wrote the offers up and my agent presented to the seller's side. I will say that I always go into looking at/negotiating on a property with the confidence and attitude that I can buy it on contract.

When Im working directly with a seller Im always VERY upfront about how I operate. Usually they are receptive to entertaining the concept. Sometimes it has taken a good period of time to pass before the deal actually comes together. I had a duplex and the 5 unit close over a year after the initial conversation.

I really believe that I can put together bigger deals in much the same manner as these smaller ones. I was real close a couple of years ago only to have the seller's bank balk and threaten calling the note. I may take another shot at that one this year using a different approach.

I also have a out of state owner of a multiple building complex in the 10-20 unit range that seems to like what Im doing and it would fit well with his tax situation. Im not super excited about that deal do to it being a half hour drive from home but its a good performing property from what Ive seen so far. I also have had a few conversations with the owner of a 9 plex that is distressed. Both of these came from my marketing letter.

As I mentioned before I include a list of all the sellers Ive bought from with my offers. I think that works better than a credit report since I have an established track record. In my earlier deals I did give them a credit report.

Im rambling again, so Ill say that the bottom line is that you have to sell "you" to them. You have to get them to believe that you will pay them and take care of the property. They are your lender, so treat them with the same respect you would your banker.

I am fascinated by @Brandon Hicks model and detailed descriptions of what he does. Thank you for sharing.

Back to @Stephen Collins original question. Some random points

  1. Make sure you do really good profitable deals. Great deals help you grow faster. Mediocre deals slow you down.
  2. Many people use private lenders or partners for much of the capital they use.
  3. Not everyone grows fast. I am growing fast now but it took me 10 years to get to the position I am in now.
  4. Doing a lot of properties because you are highly leveraged (borrowing to the max) increases your risk and the high debt may kill your returns.
  5. Some people doing high volume are not necessarily more profitable. They are likely sacrificing their lifestyle to do that high volume.

@Stephen Collins

Hi Stephen,

When I first started buying property in Australia I managed to build a portfolio worth over $1million in 6 months.

The strategy was to purchase extremely undervalued properties which I would then rehab and knock on the banks door requesting them to re-finance. I would then pull out the equity and use the cash for another deal.

This strategy worked well but I found out that it was not a sustainable way in growing my personal portfolio. The portfolio was not generating enough surplus of cashflow and there where to many uncertainties if 1 or more properties became vacant.

Since I moved to the US I have sold out of all assets back home in Australia and have been buying in Kansas City and Toledo.

Our business model is based on selling turn key but we hold every 4th of 5th property.

I wish we could hold them all but to keep the business going and our portfolio growing we need to sell.

Selling also speeds up the portfolio growth. After owning around 20-30 outright we might start to use leverage and continue purchasing at a faster pace.

Thanks for reading and have a great day.

Thank you everyone for all the information. The support on here just goes to show how awesome of a community BP is!

@Brandon Hicks I have reread your postings over and over, and ran an infinite number of google searches trying to learn about your deals. First off I am very impressed, my hat is off to you. I am a service member and unfortunately mission tempo is rampant right now. Would you mind if I sent you a request and PM you when I am back?

@Don Konipol my personal goal is to buy and hold a rental portfolio. In my local area I am typically finding deals in the 8-9% Cap Rate range. What do you think, is this is an “average good deal”?

@Ned Carey I completely agree, my personal thought is I can let a 100 good deals go but I cant afford to get involved in 1 bad deal. Your second point hurts, my “partner” just backed out and got cold feet.

Originally posted by @Brandon Hicks :
Sample deal......

I added a 5 unit complex last October. After closing costs (no cash down payment) and paying fall taxes, 2 payments to the seller, starting the insurance up, doing repairs/clean-up and some other normal type expenses I had just under $2449 of my capital "stuck" in that deal at years end. As of today, after all my income/expenses including prorating property taxes and insurance through the end of the month I have a positive cash flow of $2316.57. So after 7 months of ownership I've got less than $150 invested in this property. Barring some large expense I'll have all my capital out in the next month or two.

This is a seller financed/land contract deal?

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