How to grow rental business faster? New-ish Investor

42 Replies

Hi Bigger Pockets members!

I'm Ryan from Knoxville, TN. Short-time lurker, first time poster. I've been studying and learning about RE investing for many years, but just started my business in 2016 with a small ($90k) rental property. In 2017 I built a new personal residence and converted my old residence into a rental as well. I rented this property to some friends (I know now--not the best idea).

I have a pretty well-paying job which funds my acquisitions, but it still takes me about 12-18 months to acquire each new property. Obviously as I acquire properties, I re-invest the profits into acquiring more, which contributes to the snowball effect. However, I'm looking for any strategies for growing my business faster. I'm open to diversifying from buy-and-hold to other strategies if need be. Here's my current portfolio and financial situation:

  • 3/1/1 Rental - $90k property, 50% LTV - Cash flows $480/month
  • 4/2.5/2 Rental - $260k property, 67% LTV - Cash flows $90/month, acts as mostly a tax shelter and appreciation property
  • Job allows me to save ~$1,500-$2,000 each month

Thanks in advance for all replies!

Cheers,

Ryan

Leverage the 3/1 rental to the maximum since your cash is killing the returns on the property and unload the second property to reinvest in better cash flow. 

The second property is a loser. Holding for tax shelter and appreciation is counter productive to growth. 

I would also look into whether you can realise a profit on the sale of your new build and reinvest that into a multi unit.

Get out of the SFH market and turn your investing to multi units if growth is your goal. SFHs are counter productive to growth.

Leverage is the key to faster growth and higher true cash flow/ROI.

Originally posted by @Thomas S. :

Leverage the 3/1 rental to the maximum since your cash is killing the returns on the property and unload the second property to reinvest in better cash flow. 

The second property is a loser. Holding for tax shelter and appreciation is counter productive to growth. 

I would also look into whether you can realise a profit on the sale of your new build and reinvest that into a multi unit.

Get out of the SFH market and turn your investing to multi units if growth is your goal. SFHs are counter productive to growth.

Leverage is the key to faster growth and higher true cash flow/ROI.

Thank you for the quick reply, Thomas. When you say leverage the 3/1 to the max, do you mean a cash-out refi to the max LTV (75% is the max cash-out refi I've been told by several lenders). I would lose ~$3k in closing costs to acquire $15k-$20k via that cash-out. Is that a worth-while ROI?

Regarding the 2nd property, I know it's locking up a TON of my cash, but my friends are renting it and have only been there ~6 months. They expect to live there indefinitely. This is what I meant when I said I learned my lesson about renting to friends! I don't have the heart to kick them out. After considering tax write-offs, appreciation, and debt reduction, the 2nd property nets about $1,000/month, but I don't realize most of that until I sell, which could be years from now. My plan is to use the cash from the sale of the 4/2.5/2 (whenever I end up selling it) to get into a multi-family property like a quadraplex or even small apt building.

My final question is in regards to selling my new build. What do you mean by this? I built it on family land given to me by my parents. I intend to live in this until at least my kid is grown and out of the house (11 years from now).

Thanks!

Ryan

@Ryan Bolt , I am in the same situation as you.  I too am struggling to grow my business as I have a well-paying job that allows me to save but still not able to acquire properties any faster than 12 months/property.  I am interested to get the feedback from others in regards to this same situation.  Good luck to you and hope that you get the information you need to build a prosporus business.

@Ryan Bolt , @John Frank , you may enjoy researching an acquisition strategy called BRRRR. If you do some forum searches there are plenty of posts on BP. The general idea is a flip-turned-buy-and-hold, where you rehab a property and use the created equity as the downpayment (essentially) and then pull your funds out (refinance) to be used again and again.....that way you can buy rentals at a faster rate than your 12m average. Also your ROIs skyrocket because the actual cash investment in each property is minimal....

Best of luck, Merry Christmas!

Originally posted by @Brendan J. :

@Ryan Bolt , @John Frank , you may enjoy researching an acquisition strategy called BRRRR. If you do some forum searches there are plenty of posts on BP. The general idea is a flip-turned-buy-and-hold, where you rehab a property and use the created equity as the downpayment (essentially) and then pull your funds out (refinance) to be used again and again.....that way you can buy rentals at a faster rate than your 12m average. Also your ROIs skyrocket because the actual cash investment in each property is minimal....

Best of luck, Merry Christmas!

 Brendan,

I have seen the BRRRR technique and I'm just not sure it's for me right now. I would need a HML to finance the acquisition and repairs, and from what I've researched, I'll still need 20-30% in cash and/or reserves. I'm a consultant, so I'm on the road for work a lot, which means I'd have to hire a GC to perform the repairs and manage the project. There goes another 30% to pay the GC. Finally, for BRRRR to work, I'd have to be at 80% LTV or less after repairs for a bank to refi, which means I'd still need to have a healthy margin of cash to take out, so you're looking at like 60% LTV after repairs to get decent cash back out. Maybe I'm missing something, but this strategy seems a lot more difficult and riskier.

Please educate me if I'm missing something here.

Ryan

Ok. So let me see if I can throw some suggestions out but I think I have some questions.
1) If your goal is to speed up the growth of your portfolio, you really have no choice but to go the BRRR method.

2) Even with the BRRR method, you're going to need some capital which is why the initial poster's suggestion above about refinancing the 3/1 makes sense. And no, its not worth it to spend 3k to 4k to get 20k. But you could find a lender that will do a heloc on an investment property and that should save you quite a bit of those costs. Not all lenders will do heloc's on investment properties. But the ones that do, will typically have some guideline that you have to have 4 or less properties in order to do - which you do.

So do the heloc on that 3/1, and it should only cost you about 1k or less to do it. Thats worth it to pull out the 21k or 22k.  Thats your capital reserve that you should just park in the bank and never touch. Its strictly the money you need to qualify for your laons.

3) Its too bad that you moved out of your other home already. I would have actually recommended that you gotten your heloc on that instead. There are banks that will do heloc's on primary residences at up to 90%. So you could have pulled out 50k in capital on that had you done it before you built that house.

4) In terms of selling that 260k house. DON'T.  The house makes money. The tenant is paying down the mortgage. And if you're making 1k/mo in appreciation and principal paydown, thats a winner.  In 20 or 25 years, that thing will be paid off and will be worth 500k.   You already own it. 

One of the most consistent messages I heard from investors when I was first learning about real estate investing was that the biggest regret they would always give was ever selling anything. So I don't!

5) Lastly, for the BRRR to work, you use the hard money to buy and rehab the property and then do a rate and term refi to get out of the property.

My hard money lender gives me 100% of the purchase and rehab and I pay the points (4 points) plus closing costs out of pocket. he'll do up to 70% of the ARV. My end loan lenders will go up to 75% of the ARV.

So I just need to find something at 70% of what it will be worth after the rehab and then the only thing I come out of pocket is the 4 pts (typically 4k to 4,500) plus the closing costs (1500). And then I get the property tax credit applied to that to knock it down a little.

You can stretch your capital out way further than you think.

I'd guess you could go to buying 3 or 4 houses a month with the income your saving now. Plus the rental income will start to build and you can use that in there as well.

Equity is dead cash. Costing you lost income ever year. A $3000 cost to free up 15 -20K is well worth the cost. Shop for a bank that will go higher that 75%.

Time to learn a new lesson. You can not carry your friends and lose money. Bottom line is Money is more important than friends. Dump them, they are costing you money and no one needs friends like that. Time to put on your big boy pants and let them know they need to go. If they are indeed friends they will understand and move out. If it costs the friendship then they were never friends only leaches and good riddance. No place for emotions in business.

It is unfortunate you sunk money into a build on family land. More dead equity. Too bad but these are the decisions one makes in life. Investing or personal life decisions. Too late now. Try to pull out any equity you do have with a HELOC and invest that.

Best you can do is move forward, fix your mistakes, and hope not to make any more bad investment decisions.

Thank you for the advice thus far. I will look into HELOCs for the two investment properties and see if that method of acquiring working capital can pan out.

I've read that leveraging your own personal residence is never a great idea when it comes to RE investing. If your business goes asunder, you could end up losing the roof over your head as well. Makes sense to me. My primary residence is around 80% LTV and I didn't put any cash in that build as the land was worth 20% of the deal, so I had instant equity in it. Sure I could HELOC it up to 90% LTV and get maybe another $50k out, but I'm putting my own home at risk then, and I'm not sure I'm willing to do that...

Fastest way to do this in my opinion, and this is how we are doing it, is fix and flip, take the money from the flip and buy a rental then at six months do a cash out refinance to get that money back. Extra costs come with marketing to find these deals, internet/mail. If your looking to grow fast then this is the best way if you don’t have a lot of money already.

Of course, the BRRRR strategy is one approach. However, another way is via syndications. Yes, this may sound scary and probably not for everyone l but if you are looking to scale fast using OPM is definitely another strategy in your toolbox you can deploy.

Good luck. Thanks! - Ola 

Most serious investors are more than willing to pull the equity out of their home to invest. Who ever told you it was a bad idea was a hyper conservative investor. Growth requires cash and you have plenty of it sitting dead and buried not presently earning it's keep.  To invest means taking risks.

Each to their own but you did ask how and now you have your answer.

@Mike H.

Curious - do you know any lenders that are offering HELOCs on rentals? The only one I've seen is a credit union that will only work with people related to the military in some capacity. Also, even more curious - HML who finances 100% of purchase and rehab?? Would you be willing to share the info? Also, what's the interest rate at with that lender?

@Ryan Bolt I agree with @Thomas S. re: HELOC. The way I think about it is is, it's much cheaper than hard money, and more than likely cheaper than most private money you'd find as well. Sure, in theory you're putting your house "on the line", but really in essence you're just using actual equity that you currently have in the house rather than borrowing a brand new loan. I am currently in the process of actually increasing my HELOC to open up more access to capital for future projects once my current ones are done. Also, I am in the Knoxville area - if you are interested in going the HELOC route, let me know. I am working with a local credit union who is offering me 100% LTV - the appraiser just came to my house today actually, I'm looking forward to closing on the new HELOC in a few weeks.

Ryan I'm curious to why you placed 50% down on your first investment property? Or am I missing something on how LTV is at 50 in just a year? I'm not seeing a favorable ROI on that unit. Can you provide more info on why you chose that property?

Originally posted by @Tae C. :

@Mike H.

Curious - do you know any lenders that are offering HELOCs on rentals? The only one I've seen is a credit union that will only work with people related to the military in some capacity. Also, even more curious - HML who finances 100% of purchase and rehab?? Would you be willing to share the info? Also, what's the interest rate at with that lender?

@Ryan Bolt I agree with @Thomas S. re: HELOC. The way I think about it is is, it's much cheaper than hard money, and more than likely cheaper than most private money you'd find as well. Sure, in theory you're putting your house "on the line", but really in essence you're just using actual equity that you currently have in the house rather than borrowing a brand new loan. I am currently in the process of actually increasing my HELOC to open up more access to capital for future projects once my current ones are done. Also, I am in the Knoxville area - if you are interested in going the HELOC route, let me know. I am working with a local credit union who is offering me 100% LTV - the appraiser just came to my house today actually, I'm looking forward to closing on the new HELOC in a few weeks.

Hey Tae, I am thinking about switching banks, do you mind to share the credit union you are using? Is your lender familiar with investors? 

Operating a business requires the ability to sometimes make tough (uncomfortable) decisions. As you take actions to match your ambition, you will always find yourself in these positions. You don't necessarily need to kick your friends to the curve, but have a sit down with them and explain them that your goals have changed. It happens. 

If you really want to grow faster, you must acquire more doors. And the best way to do it is to start seriously looking into Multi Units/Apartment buildings or even office buildings. Single Families won't do it. You are wasting your time there. 

I recently sold 4 SFR and purchased a 20,000sf office building. So far, it looks like a stroke of genius. No need for me to drive to 4 places to check out my investment. One Property Management for all. One Leasing Agent. Tenants sign long term leases with yearly escalations ...

(919) 434-3132

@Tae C.

The lender that did a heloc on my rental property was first midwest.  They did one and then I went to do another one and they declined. They said they are only allowed to do that loan if you have 4 mortgages or less. I told them I had way over 4 when they did the first one. They said they weren't even supposed to do that.

Since then, I've found that to be the rule for most of the banks. The few that will do heloc's on investment properties typically have a guideline about having max 4 mortgages in order to get it.

In terms of the terms I'm getting from HML thats doing 100% purchase and 100% rehab. I'm paying 4 points and 12% interest. No appraisal fees, no doc fees, and no surveys though so that helps too.

@Ryan Bolt I think there are two things that you should ask your: 1.) What's your risk tolerance?  and 2. ) Are you a control freak?  

If you have a low risk tolerance you'll probably like the "cushion" that you have in LTV with your two rentals. You don't have much cushion in cash-flow for the 2nd property but if the market dips you could still refinance (likely) with either or just be able to sell the property and get out of it. If you have tiny amounts of equity and the market dips you *could* find yourself in a place where you'd have to come out-of-pocket to sell the property. Luckily, you seem to have a quality W2 job so you could stomach market swings better than most. But if you do have that high(er) risk tolerance you could go for 75% or 80% LTV of the properties, pull cash-flow, buy something that cash-flows, and snowball a teeny bit faster.

As for being a "control freak" that references going into partnerships, syndications, etc.  I could never do it as it's not in my DNA.  I want to control the asset, I don't have to have to worry about other partners needing to sell, etc.  And if I mistake then it's my mistaken to (financially and emotionally) own.  I wouldn't want to give up control by being a passive investor in someone else's deal.  That said, plenty of investors do that with success or set up their own partnerships.  It's not a bad strategy (by any means) because it can get you to "more units quicker".  And more units just means there more predictability in that you'll never be "50% vacant" if 1/2 units isn't rented and if there are enough units then expenses become more predictable but their is "always something breaking".  

As with all things, your mileage may vary!

Originally posted by @Randall Shields :

Ryan I'm curious to why you placed 50% down on your first investment property? Or am I missing something on how LTV is at 50 in just a year? I'm not seeing a favorable ROI on that unit. Can you provide more info on why you chose that property?

Hey Randall. I didn't put 50% down. I bought the property in the summer of 2016 for 57k and put down 20%. Since then, comps place the value close to 90k. I realize that's a bit optimistic, but I feel it could sell for 85k if I decided to liquidate. Since I owe less than 45k, that puts the LTV around 50%.

I chose this property because I could acquire it for 57k and it rents for $800-$850, or 1.4%, which was a no-brainer in my mind.

Thank you very much for all the responses! I have inquiries out to several local credit unions regarding HELOCs for the investment properties, and will also inquire about HELOC'ing my personal residence. That would free up enough cash to qualify for HMLs and start doing the BRRRR technique.

I'm curious, though. Several people have suggested going into multi-family units, which I agree is a good strategy. Can I just as easily apply BRRRR to MFHs as SFHs? Or does the technique shift a bit?

Ryan, you can definitely apply the BRRRR to MFR. One thing to keep in mind is the appraisal is higher($1500 or more depending on the # of units, compared to $500) but that shouldn't be a problem.
Just making you aware of the numbers. From my limited experience, the BRRRR strategy is even more powerful with MFR

@Daniel Beaulieu

But unfortunately not in the state of TN currently it seems...

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