From 2 to 10 by Year End - am I crazy?

Question

I’m relatively new to RE investing.  I purchased 2 SFH’s last year and they are doing relatively well.  I initially thought it would strictly be passive, but I’ve got the bug!  And like anything else in my life, I go ALL in.  I’ve done countless hours of reading, researching, etc. and now I’m ready to pull the trigger.  My initial goal is 10 by the end of the year.  I’m looking to stay cash flowing each property north of $300 while keeping the price south of $80k.  Difficult but not impossible given my other two’s experience.  Obviously there just isn’t an abundance of these deals out there.  I’m looking at a potential BRRRR deal and considering a direct mail campaign.  What’s everyone’s thoughts and potential other strategic ideas to help me reach my goal?  I appreciate the conversation!

Marc Winter · Answer

Maybe time to take a deep breath and consider:

When people get the re bug, they often loose track of the harsh realities of investing vs the excitement of doing a deal.  You are admittedly backing off of your own self-constructed cash flow goals in order to meet your number of investment properties.  That's a recipe for financial disaster.  Instead of being dedicated and focused on finding deals that meet your criteria, you are sliding down a slippery slope of "looking for growth in all the wrong places by thinking, "well, it's $100/door and that's ok," when in reality that number will end up being negative with one semi-major expense.

Some new investors might not understand, given the last several years of hot-market appreciation:  leverage is a two-edged sword.  They might never have seen the growth cycle turn into a bust cycle.  They may never have had their guts cut out by recession keeping tenants unable to pay their rent, and over-leveraged owners with tons of vacancies unable to pay their mortgages and re taxes.

Remember, saying your property is all rented through 2020, DOES NOT MEAN you will be receiving rents through 2020; it ONLY means you may have a lease in place.

So don't be discouraged if you can't find that perfect deal today--keep looking and be persistent and you will find it.  Don't rush it, stay disciplined, stick to your goals/parameters and remember you are investing for the long-term.  Good luck.

Theresa Harris · Answer

If you have the resources, add to your portfolio when the right properties come up.  The rentals I have now, I bought 2 within a few months of each other, got those sorted (one needed repairs and renos), saved up and bought another two (same situation one was in need of MAJOR repairs).

You want to make sure that as you are buying them, they are rented before moving on to the next to avoid lots of carrying costs.  This will also let you space out your leases, so all of them don't come up for renewal at the same time.  Keep enough in the 'bank' for repairs.  The number will increase as you buy more places and things seem to happen in multiple properties at the same time.

Rex Celle · Answer

@Mike Rutherford Form strong relations with banks, make sure to have the down payments (I.e. 25% for commercial loans). Set up a scalable business model where are you have seasoned agents on the ground who specialize in investment properties hunting for you, Property management companies to quickly on board, and closing attorneys that can close deals fast for a reasonable price. Identify a credible insurance company that deal with Investors that have real estate portfolios.

10 properties per year is a very good target, and can definitely be realistic if you want to acquire ones under $80,000. My target is five property per year, and if I miss, I carry the remainder of my goal into the following year ￼to average out to 5 annually. My advice is to have an aggressive goal, but be a sharpshooter at the same time covering all angles above before moving on to your next acquisitions

May Emery · Answer

@Mike Rutherford Sounds like you are very ambitious!

Keep in mind that you should be mailing to people who aren’t in every other investor’s site. Absentee Owners have been popular for a long time, and are apparently still somewhat effective (people are still mailing to them).

There are some owner-occupied segments with people who share motivating factors for selling their home.

Seniors with Long-time Ownership: often ready to downsize or transition to assistance.

Homeowners with Low Financial Stability Scores (FSS): Struggling financially and likely ready to cash in on their asset.

I know you said you want newly renovated, but you can find some lower priced properties when you are willing to put some of the second "r" in the BRRR - especially once you have a bigger cushion built and can have time to be vacant before getting higher rents.

Both these categories have additional advantages in that they probably don’t haven’t been updated and may have deferred maintenance. They won’t be expecting the same money as their neighbors with the shiny new kitchen and fresh paint.

Mike Rutherford · Answer

@TheresaHarris I bought my first two within a few months of each other as well.  They were in good shape and already rented.  So I was able to have a cushion built up to float the first vacant month. My property manager did a good job getting it rented and the deposit paid to get the carpets cleaned.

All of my cash flow goes back into my “operating” account.  I’m not using any of it personally, that way I’m not worried about vacancies and minor repairs.  I’m buying relatively newer (or recently renovated with roof and HVAC) so I’m hoping to mitigate against anything major.  Except for my potential BRRRR project.  I’m expecting at least one month vacancy per property, although I just renewed one of them without any turnover.

Mark Fries · Answer

@May Emery

I love reading your replies.  You seem to know a lot about mailing lists and although I'm not in that business if I ever started to do wholesaling I would definitely use your services.

Mike Rutherford · Answer

@Marc Winter  Thanks for your reply.  After reading a few books and really analyzing different scenarios, I realized the $300 marker was not a reality.  While I am truly 'netting' $300+ a month, what I wasn't considering was capex and maintenance reserves and vacancy loss, because I haven't yet experienced them.  Having said that, when I consider those future losses, my net cash flow is more in line with $100-$200 per month.  I do realize this a long-term game and I am building reserves with the current cash flow.

Thomas S. · Answer

Properties are normally purchased one at a time (number of doors vary per property). Setting goals have little value when uncontrollable factors are at play.  There is no harm in setting a goal of 10 providing you only do it as a fun challenge.

If qualified properties or financing are not available and not controlable setting goals has little actual value.

Mike Rutherford · Answer

I'm also looking at a quad across the street.  Baseline numbers:

List price:  $229,000

Current rent roll: $2,675

I would likely manage myself and likely leverage my HELOC to be fully leveraged.

Thoughts?

Mike

Mike Rutherford · Answer

Update: I'm under contract on a duplex, +2.  It could use a little updating but has a brand new roof, thanks Hurricane Michael.  It's fully rented through 2020.  I actually used my HELOC for the down payment, so technically I'm in with no money down.  Here are the details:

Purchase price: $109,000

Rent roll: $1,300 ($650 per side)

First mortgage: 75% at 5.375% for 30 years

Second mortgage: 25% at 5.5% at 20 years

I'll be managing it myself.  As I'm tweaking my goals, I've backed off my $300 target and looking to be net cash flow of $100-$200 per door and be highly leveraged.

Please share your thoughts on this deal and offer up any advice going forward!

Thanks -

Mike

From 2 to 10 by Year End - am I crazy?

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