How to build a rental empire?

Question

Hello everyone!

This is my second post.  Brand new investor here looking to purchase my first property soon.

Ignoring the fix & flip side of things, and just talking about buying homes and renting them out, is the general idea to buy a property, rent it out for positive cash flow (after PITI & expenses) and using that cash flow to help with the down payment on a second property and using the 1st house as collateral for the second loan?

So each previous property is collateral for the next?  Just curious how lenders look at that.  Obviously, speaking personally, I wouldn't qualify for say, 3 mortgages if I were going to live in them, but if I have 3 homes and rent each of them out with positive cash flow and positive equity, I would most likely qualify for a 4th loan, a 5th loan, etc.? rinse and repeat?

Michael Rossi · Answer

John,
            
            Actually, the vast majority of newbies in the real estate business fail.  So, statistically, you will be facing losses.  The key is to understand the business before you start and always be sure that you'll have a positive cash flow.
            
            Mike

Peter Vekselman · Answer

Regardless of what specific real estate investing strategy you employ in your business, real estate represents the single best method of creating long-term, sustainable wealth available today. While the stock market can be extremely explosive and subject to radical day to day shifts in value based upon economic news, oil prices, and political instability around the world, real estate is remarkably stable and has consistently trended upwards in value for the last 100 years. While it is true that real estate values have taken a severe kick in the teeth as of late, investors utilizing a buy and hold strategy are still making money while the rest of the market is struggling.
In order for this strategy to work, it's necessary for you to purchase property as inexpensively as you can and to ensure that the cash flow generated from your property is consistently more than the expenses associated with owning it. In order to guarantee that this happens, you need to perform an accurate cash flow analysis of your property before making the purchase. The following components are critical to your success:
â€¢	Income â€“ the single largest income item associated with your property will be rent. It's imperative that you know your local real estate market and how much similar properties are renting for. If you estimate that your property will rent for $1500 per month and market conditions will only support $1200 per month, you can very quickly get yourself into trouble with negative cash flow. 
â€¢	Expenses â€“ Novice real estate investors often don't have a true grasp of expenses or how to accurately estimate them.  Because of this lack of knowledge, many investors have been known to blindly accept expense figures offered by real estate agents or the property seller. This is dangerous because the seller has an incentive to minimize expenses in order to make the investment look as attractive as possible in order to get it sold; the real estate agent stands to earn a fat commission check. When you estimate the expenses for your property, use documented, provable expenses whenever possible, but also use the smell test. Don't forget to factor in an allowance for vacancy because no property can remain rented 100% of the time without fail.  You should also be sure to factor in an expense for property management, whether you intend to manage it yourself or hire a professional to do it for you.
â€¢	Reserves â€“ Regardless of how new a property is, things are bound to break or need replacing. For instance, water heaters, furnaces, and appliances will invariably break down. When this happens, they need to be replaced. By setting cash aside for these situations, you can be prepared when or if repairs become necessary. If nothing ever breaks, cash will be available for you for any other purpose.
As long as your property will provide you with positive cash flow on a consistent basis, you won't be rocked by market fluctuations, including rapid depreciation of real estate values. You'll still have a positive cash flow to rely upon for consistent monthly earnings. In addition, as the number of properties you own increases; your monthly income will improve. If each property you own has a positive cash flow of between $200 and $500 per month, you can see how lucrative owning 15 or even 20 properties can be.
This monthly income is ongoing and life-changing.  You can literally reap the rewards of real estate investing by building a generational cycle of wealth creation that will live on long after you exit stage left.
Holding property as a long term rental also offers tremendous tax benefits to you through depreciation â€“ an ingenious tax code creation of Congress that allows you to take a depreciation tax credit while the actual value goes up â€“ while deferring capital gains taxes until you sell.  
Invest early and invest often in property that will provide you with ongoing cash flow.  As this cash flows into your real estate business you can use excess funds that you donâ€™t need for your day-to-day needs to fund acquisition costs of additional properties that will allow you to better take advantage of other investing strategies that will provide you with potentially huge infusions of cash, further enhancing your bank account and allowing you to live YOUR American Dream.

Mike V. · Answer

I just refinanced my 2nd rental property last week.  I ended up buying the sfr with cash to help make the deal but what I found out was that regardless of the appraisal (which was 32% over what I paid for it) the bank would only lend my 75% of the purchase price since there was no mortgage on the property.  I use this lender since they don't sell to Fannie or Freddie so no seasoning issues but they implemented this policy about two weeks before I closed.  All kinds of restrictions and rules are poping up so ask a lot of questions from your lender and assume nothing.

John Stark · Answer

I thank everyone who replied for helping the thread take off!  In my absence (BUSY at my 9-5) a lot of great info really came out.

Thank you!

Jimmy Rodriguez · Answer

wow, great thread, and great info Tom, Thanks!

Bill H · Answer

Does the seasoning issue apply to certain banks?  ie does anyone know of banks that do not have a seasoning requirement?

Tom C · Answer

Sure.. When I say seasoning. It's how long you have owned the property. When you go out to sell the home in a flip situation or when you just want to refi it.. Banks used to require that you owned the home for 90 days or more before they would take the new appraisal price. If you didn't have 90 days on the title, it didn't matter how many receipts you would provide to them showing improvements, they would still only look at your purchase price or what the house appraised for when you bought it.

An example.. I pay 14K cash for a house. In 3 months I want to refi it and pull some money out.. I pull a new appraisal and it comes in at 53K.. The banks used to accept that with documentation of improvements.. Now they will not, they say. It's only worth the 14K you paid for it, unless I wait one year.

I am not sure what this new 1 year requirement will do to people who are using HM and need to refi or sell within 6 months. I am sure HML's will have extend their requirements out to one year now.

Allan Hamill · Answer

Also, don't forget about seasoning issues. Many banks over the last year went to from 3 months seasoning on the title to 6 months and now 1 year.

hi tom 
newbie here, could you explain what seasoning is please.
allan.

Brendan O'Brien · Answer

You must make sure you have cash to cover expenses.  As Tom said, when you live on the edge, if one of your properties goes vacant, the whole house of cards comes tumbling down.

Now there are some people who have built RE empires faster than the rest of us by being extremely gutsy and extremely lucky.  It helps to be very smart and have great timing (hi, Mr. Trump!)  For every one Donald, there are 99 others who took the same level of risk and lost.