Hello! I'm a new RE investor and my strategy is buy/hold specifically in single and small multi family. I'm working on business plan and long term strategy (1 year, 2 year, 5 year, 10 year out) and after using a cash flow calculator (Excel) in working out some scenarios, I'm wondering if I'm on the right track. What is the best way to grow your portfolio assuming going the standard way of financing (20-25% down)?
To keep things simple, let's say I'm considering 2 similar small single family units that cost $100k each. Certain assumptions I'm making ...1.3% rent to purchase price rule, 50% operating expense. In this scenario, cap rate in the 2-3% range and cash on cash return is in the 10-12% range.
Based on this scenario, I plan to take the cash flow proceeds from both properties into property 1's note to pay it down and my payment calculator calculates note fully paid in about 6 years. Then, I'd take all the proceeds from property 1 and property 2 and apply to property 2's note. The calculator says I'd pay #2 off in about 10 years. So, 2 properties owned free and clear in 10 years. After that, wash and rinse with 2 more properties.
Sounds great? Sure, but all that time, my cash was tied up in these 2 properties and I'm not taking into account anything out of the ordinary like capex repairs, etc. Is this the strategy for growth in a portfolio? Or is the answer, "Felipe, you gotta use other people's money to buy more properties - economies of scale"? Looking for guidance on this!
Thanks in advance!
@Felipe A. All about risk tolerance - based on the plan of buy and payoff rapidly, it looks like you might be a little more risk adverse? Your strategy is not the fastest way to acquire but it is pretty low risk.
As an example of how others might do it - I used hard money to buy and fix rentals, then refi into long term loans. I looked up after having about 10 properties and the mortgage debt to go with it and decided to start rolling the cash flow back in to reduce liability. Our market also became pretty tight and prices are too high to continue buying at that pace. All the proprieties perform well, but we cant see into the future.
Often times investors get hopped up on doing a lot of deals, buying a bunch of property, I think that you would find that using your strategy will still make you a wealthy man in 25 years. It doesn't take a 100 houses to achieve a great lifestyle in real estate.
If you're looking to simply grow your portfolio, I think that leveraging your rental income into more properties, rather than paying down the mortgages, would accomplish that goal quicker. I also wouldn't do anything (either reinvesting or paying down) until I had "sufficient" reserves to meet an emergency (your definition of sufficient will be different from mine).
A good compromise would be to save half of your rental income for reinvesting and half towards paying down mortgages for a plan that's still workable, but accomplishes the twin goals of more properties + lower mortgages.
Thanks, Linda. My question, though, is since I'm dealing with SFH/MFHs, that annual net income is not big money ($2-4k per year). If I'm holding some of that in reserve, it seems like a long time to wait to generate the cash flow needed to buy another property. So, this gives me pause at my strategy to acquire multiple properties in the near term.
Felipe, I understand your situation, mine is very similar. My houses are cashflowing roughly the same way yours are.
Depending on your area, appreciation may help out a bit. Lets say you get four houses and wait a few years, three of them might have appreciated to the point of being able to pay the 4th one off. OR they have appreciated to the point of where you can now pick up a smaller multi, and have the 25% down w/ a 1031 exchange.
But there is risk in this - 4 houses = 4x problems to arise. Roofs, A/C, water heater etc. Keep cash on hand to deal with the issues that will arise.
Carter, I hear you. I think the ideal scenario here is buying a couple properties with 20-25% down and then finance another one or two a bit more unconventionally requiring much less money down thereby keeping your cash reserve (via portfolio loans, etc.).
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