Buying Strategy with $80k For Rentals

18 Replies

I am trying to figure out the best moves to make for my next couple of rentals and I am hoping you guys can offer some advice. First I will start off with a little background.

I am 23 with a full time job making $60k a year. I live pretty frugal and save about $15k a year that I have been using to fund my rentals along with a few successful flips (will not be doing anymore flips anytime soon). I do not have a set end game at this point, I just want to continue adding more rental property.

I currently have 3 single family rental properties. Two of them have mortgages and a third is paid off. They average about a 20% cash on cash return. 

The properties in my area are in a C class area and I can get them usually for about $30k with putting about an additional $5k into them, roughly. 

I also have my primary residence paid off and the house is work $125k. I am considering getting a new mortgage on it for about $80k to use to continue buying buy and hold properties. I am not sure if I should buy 2 additional houses in cash or if I should use the money as a downpayment and fix up money for multiple. This is also assuming that I will be able to get multiple mortgages without my DTI getting to high and feeling uncomfortable.

Any advice to me would be great appreciated!

First, the biggest mistake you're making is not "having a set end game at this point".  If you don't have a defined goal, or set of goals, how will you know whether or not you're actually making progress?

The "score" you have when REI isn't the number of properties, it's the number of dollars...and it should be based on your needs. Simply wanting a couple more rentals isn't a plan. If you knew what your ultimate financial goals were, your main question of "what do I do next", would be answered for you.

Start by listing all your monthly bills (ALL), and then make a list of all your one time and yearly debt.  Make sure your list of OT/Yrl is in order of payoff priority with the ones at the top having corresponding monthly payments. You should have a number of items that will appear on both lists (i.e. car payment, credit cards, etc...).  The totals, are you goals, because those are your needs.

Now, the fun begins.  The total under monthly bills is the amount of cash flow you need per month.  This can be reduced by paying off some of the OT/Yrly debt.  Remember, if you pay off a credit card, or a car, that monthly bill disappears.

This is a form of reverse engineering...and it works all the time.

Originally posted by @Tyler J. :
I do not have a set end game at this point, I just want to continue adding more rental property.

 It sounds like you have a fantastic start and have accomplished much more than people even twice your age have done so far.  But there is a saying, "Begin with the end in mind." So I agree that should be your next step.

I guess I do have a end game at some point. I would like to quit my day time job when I reach roughly 15-20 properties generating solid cash flow that I can live on and continue to grow. After that,  I would like to focus on more of larger apartment complex, but do not feel that I could manage everything while still working full time. I do not like the idea of hiring a property manager, I like and enjoy taking care of everything myself. 

That is part of my plan I suppose and I believe continuing to grow is my "end game". There is no set amount of properties that I plan to stop at, only when I feel like I am maxed out personally. 

@Tyler J.  At some point, managing single family may become more than you are willing to do.  There are economies of scale in apartment complexes - especially when over 50 units where you can often have on site management running things for you.  And if you learn how to execute a value play, there is huge money to be made if you so desire.  Again - need to define your goals first.

On the question of financing your single family properties, as along as you are doing SFRs, your will have higher cash on cash return if you use financing.  Also, from a risk mitigation standpoint your properties are less of a target for lawsuits if they are financed.  (Maintain your properties, screen your tenants well, keep up your end of the lease, and keep good liability insurance as a first protection against lawsuits).

Originally posted by @Tyler J. :

I guess I do have a end game at some point. I would like to quit my day time job when I reach roughly 15-20 properties generating solid cash flow that I can live on and continue to grow. After that,  I would like to focus on more of larger apartment complex, but do not feel that I could manage everything while still working full time. I do not like the idea of hiring a property manager, I like and enjoy taking care of everything myself. 

That is part of my plan I suppose and I believe continuing to grow is my "end game". There is no set amount of properties that I plan to stop at, only when I feel like I am maxed out personally. 

 That's not a plan Tyler...that's just kaos.  Sit down, put the numbers down on paper.  Work your way backwards based on what the rental market in your area will "give".  Figure out how many rentals you need based on what the market will "give".  That will give you an idea of what your goal number of properties is.

Adjust as you acquire...and your needs change.

Originally posted by @Joe Villeneuve :
Originally posted by @Tyler J.:

I guess I do have a end game at some point. I would like to quit my day time job when I reach roughly 15-20 properties generating solid cash flow that I can live on and continue to grow. After that,  I would like to focus on more of larger apartment complex, but do not feel that I could manage everything while still working full time. I do not like the idea of hiring a property manager, I like and enjoy taking care of everything myself. 

That is part of my plan I suppose and I believe continuing to grow is my "end game". There is no set amount of properties that I plan to stop at, only when I feel like I am maxed out personally. 

 That's not a plan Tyler...that's just kaos.  Sit down, put the numbers down on paper.  Work your way backwards based on what the rental market in your area will "give".  Figure out how many rentals you need based on what the market will "give".  That will give you an idea of what your goal number of properties is.

Adjust as you acquire...and your needs change.

 But do we not always strive for more? Why does someone have to have a set number of properties? Having 10 properties would satisfy my needs for living, no problem. But why stop there? Why not continue to keep growing with no set number? I am not trying to be rude by any means at all either. 

Say what you will, but this kid is crushing it. Congrats on your success so far, @Tyler J.  

While I do agree that you absolutely must outline in detail what your goals and end game are, you're off to a great start and that should be recognized. Conservatively, you could leverage your free and clear property at 50% and can easily buy multiple SFRs. My total cash out-of-pocket on the 4 rentals I bought this year totaled under $7k. Granted, you must maintain healthy reserves, but 50% will more than allow this for you and will not over leverage your free and clear property.

Originally posted by @Jason Measures :

Say what you will, but this kid is crushing it. Congrats on your success so far, @Tyler J. 

While I do agree that you absolutely must outline in detail what your goals and end game are, you're off to a great start and that should be recognized. Conservatively, you could leverage your free and clear property at 50% and can easily buy multiple SFRs. My total cash out-of-pocket on the 4 rentals I bought this year totaled under $7k. Granted, you must maintain healthy reserves, but 50% will more than allow this for you and will not over leverage your free and clear property.

Thanks for the kind words. 

Do you mind outlining, not necessarily full detail, what you did last year to only be around $7k out of pocket? One big issue I run into in my market is that the house usually cannot be refinanced for a higher ARV than what I purchased it for. For that reason I do the minimum amount of work to them and start renting them out right away. The houses around them just aren't worth it and cheaper houses.

@Tyler J.  You're missing the point.  Setting a goal means you are not spinning your wheels to that point...and you are accomplishing something positive.

Once you reach that basic goal of income matching expenses, you then expand those goals.  Where did I say anything about stopping?

@Tyler J.  

  just remember as you get older your expense's will grow.. family etc.

as you make more money your taste's will change to,,, or normally they do... Kind of Human nature to treat yourself to things you may not think you would do today.

If your in a town and it sounds like you are where you can buy these low priced assets its one of the great things we can do with nothing more than a modicum of education and effort and desire and create some financial security... And at those price points I would also look at trying to buy some owner financed deals.. show the owner were a no interest short term loan's NPV  ( see J Scott's post on the topic) equals long term higher rate of return.. shoot for break even and even negative cash flow on those but know you will own them free and clear in 3 to 5 years.. your young enough to do this.. and as your own contract 0 interest notes pay off month by month your cash flow goes up exponentially and so does your net worth.. NO one can criticize you for owning RE free and clear..

Get 20 of these homes paid for over the next 10 years and there you go your 33.. with 10k a month net cash flow and no debt.. now that would be cool right?  and with no debt you can ride out any storm that may come your way.

So that's one way to look at it.

@Tyler J.  I'll PM you with those details so as to not flood this post.

@Joe Villeneuve  I totally agree with you, and I believe Tyler does too, but perhaps needs an example. Would you mind sharing with us what your goals and end game are? I think we could all benefit from your veteran insight.

Originally posted by @Jay Hinrichs :

@Tyler J. 

  just remember as you get older your expense's will grow.. family etc.

as you make more money your taste's will change to,,, or normally they do... Kind of Human nature to treat yourself to things you may not think you would do today.

If your in a town and it sounds like you are where you can buy these low priced assets its one of the great things we can do with nothing more than a modicum of education and effort and desire and create some financial security... And at those price points I would also look at trying to buy some owner financed deals.. show the owner were a no interest short term loan's NPV  ( see J Scott's post on the topic) equals long term higher rate of return.. shoot for break even and even negative cash flow on those but know you will own them free and clear in 3 to 5 years.. your young enough to do this.. and as your own contract 0 interest notes pay off month by month your cash flow goes up exponentially and so does your net worth.. NO one can criticize you for owning RE free and clear..

Get 20 of these homes paid for over the next 10 years and there you go your 33.. with 10k a month net cash flow and no debt.. now that would be cool right?  and with no debt you can ride out any storm that may come your way.

So that's one way to look at it.

Looking for Owner Financed deals is something I need to look into more. Most of the homes I look at and buy are foreclosures and banked own. 

I do like your outlook of everything though, so thank you!

What's your goal?

We got started at 23. Our goal has always been early retirement from the navy. So everything we have done has been towards this goal. We buy class A properties. We fund them buy living frugally, and leveraging as much as possible. We have great secure jobs, so we are comfortable with our plan. We have grown to 5 houses in 3.5 years with the goal of another 5 in 1.5 years. For we have baby step our way to here, evaluating every situation as it arose.

So it really comes down to what do you want, how quickly do you want to grow, and your end goal :)

Originally posted by @Jason Measures :

@Tyler J.  I'll PM you with those details so as to not flood this post.

@Joe Villeneuve I totally agree with you, and I believe Tyler does too, but perhaps needs an example. Would you mind sharing with us what your goals and end game are? I think we could all benefit from your veteran insight.

 When I first started out, around some && years ago, I had a goal of...., uhhhh,....making it rich??  I had a mentor (one of many) that laughed at that statement.  He asked me to, "define rich".  My answer was, "own a lot of properties, and have enough income so I don't have to work".  His answer was (again laughing), "that's not a definition...that's a description".

Your goals, your financial goals, is your description of "righ/wealth", and they are based on your needs...your financial needs, at the time you set them.  Needs, and the goals that you strive for to achieve them, are always changing as life happens.

Without goals, based on your needs, you just spin your wheels.  Use the goals to work backwards (reverse engineer) to develop a plan of how to get there.  If you were presented with 2 properties, and you could only get one, which would you choose.  Here are your choices:

1 - Cost $50,000; ARV $80,000; Cash Flow $300/month, or....

2 - Cost $70,000; ARV $80,000; Cash Flow $750/month.

Originally posted by @Joe Villeneuve :
Originally posted by @Jason Measures:

@Tyler J. I'll PM you with those details so as to not flood this post.

@Joe Villeneuve I totally agree with you, and I believe Tyler does too, but perhaps needs an example. Would you mind sharing with us what your goals and end game are? I think we could all benefit from your veteran insight.

 When I first started out, around some && years ago, I had a goal of...., uhhhh,....making it rich??  I had a mentor (one of many) that laughed at that statement.  He asked me to, "define rich".  My answer was, "own a lot of properties, and have enough income so I don't have to work".  His answer was (again laughing), "that's not a definition...that's a description".

Your goals, your financial goals, is your description of "righ/wealth", and they are based on your needs...your financial needs, at the time you set them.  Needs, and the goals that you strive for to achieve them, are always changing as life happens.

Without goals, based on your needs, you just spin your wheels.  Use the goals to work backwards (reverse engineer) to develop a plan of how to get there.  If you were presented with 2 properties, and you could only get one, which would you choose.  Here are your choices:

1 - Cost $50,000; ARV $80,000; Cash Flow $300/month, or....

2 - Cost $70,000; ARV $80,000; Cash Flow $750/month.

I would choose option number 2 as those are similar deals I currently work with. Homes aren't worth much more than purchase price, but generates good cash flow. 

I suppose financially my current goal is 15 free and clear homes that will generate roughly $100k/year in within the next 10 years. 

@Tyler J.  OK.  Based on your numbers, that means each house would need to generate over $550/month.  Does your market allow for that to happen?  If yes, then what would each of those properties cost you?  Keep in mind that your business plan is to own them all free and clear.

Do you understand what effect that has on the overall cost/income process...owning free and clear?  It means that you paid all cash for the entire cost of the house, and you are getting back $550/month.  In other words, if each property that brought you that $550/month cost you $80,000 all cash, you would have $80,000 in cash, all at once, in the beginning, going one way (the wrong way), and $550/month ($6,600/year) going the other way (the right way).

Now, if you plan on doing this within 10 years, it means you will be spending $1.6M on properties over a 10 year period, and receiving $6,600/year per property as you build this empire up.  It also means that your net cash flow would eventually be over $128k/month?  Is that the income level you are striving for?  I'm not critiquing the number...if you said your goal was to have $1M/month, that's find by me.  I'm just asking if you realize that was what the numbers you gave me generated?

Originally posted by @Joe Villeneuve :

@Tyler J. OK.  Based on your numbers, that means each house would need to generate over $550/month.  Does your market allow for that to happen?  If yes, then what would each of those properties cost you?  Keep in mind that your business plan is to own them all free and clear.

Do you understand what effect that has on the overall cost/income process...owning free and clear?  It means that you paid all cash for the entire cost of the house, and you are getting back $550/month.  In other words, if each property that brought you that $550/month cost you $80,000 all cash, you would have $80,000 in cash, all at once, in the beginning, going one way (the wrong way), and $550/month ($6,600/year) going the other way (the right way).

Now, if you plan on doing this within 10 years, it means you will be spending $1.6M on properties over a 10 year period, and receiving $6,600/year per property as you build this empire up.  It also means that your net cash flow would eventually be over $128k/month?  Is that the income level you are striving for?  I'm not critiquing the number...if you said your goal was to have $1M/month, that's find by me.  I'm just asking if you realize that was what the numbers you gave me generated?

Yes, my market does allow this and home prices that are generating me that figure cost be anywhere between $30-45k. 

Yes, I do understand that. In my case, I would have let's just say $45k in all cash at once, or $6600/year. I am not sure what is really meant by this paragraph or what you are getting at. 

So over 10 years, I will be spending roughly $675k on properties and get a $100k per year return. I am not sure where $128k/month is coming from? 

@Tyler J.  "So over 10 years, I will be spending roughly $675k on properties and get a $100k per year return. I am not sure where $128k/month is coming from?"

 $550/month per house x 15 houses = $8,250/month.  My apologies...sticky trigger finger.

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