How Scaling a Rental Business Snowballs
I thought I would write a post that describes my current real estate efforts and how it really has begun to snowball into a wealth building machine.
I currently own a 3.5 million dollar portfolio mixed with single family , duplex, and small multifamily properties. They are financed largely using small commercial bank notes that payoff in 15 years. I did not have a lot of money to start this portfolio, so it has been largely built on leverage and some private capital partners. I am posting this information both as an informational tool and also to get feedback from the community, as I have by no means arrived.
Assume the portfolio is leveraged at 3 million dollars @ 7% interest on 15 year notes, with a Gross income of 52,500. Expenses(taxes, insurance, and maintenance) at 40% leave $31,500 for debt service and cash flow. The monthly payment to the bank is $26,965, which leaves only $4,535 per month in cash flow prior to property management costs. In this case as I grow, I personally have decided to use this cash flow for growth in buying new properties and administrative costs in self managing the portfolio.
So assuming no monthly positive cash flow, this to me is one of the most powerful parts of scaling a rental business. Because of the power of scale, the principal paydown each month on this portfolio is $16,600 per month, or 199,200 per year. At 5 years in, the portfolio has now paid down $996,000. At 10 years in, the portfolio has paid down 1,992,000. This assumes no extra payments, growth of income, etc.
And best of all, this is the tenants money paying off these notes. I am now thinking about growing even larger portfolio to continue to take advantage of the power of this idea of scale. Doing it with single roofs has proven to be alot of work to manage, so multifamily or buying packages of homes at the same time seems to be the next step. What do you all think of this concept of scaling?