Snowball affect best route single home rentals

33 Replies

I am new here and want to hear some opinions

My goal is 100 rentals single family homes in 10 years looking at a 8-10% ROI after factoring in a 40% cost factor (vacancies, repairs, etc)

My example is (12 months of a 1250$ rent x 60%)( divided by cost of home 100k) = 9% ROI)

My main concern is how to snow ball and pay down the houses

Or save up and pay cash on homes on each purchase

Or equity loan to buy out right and repeat

Or pay off 1st/oldest loan asap and buy more with another loan cash and repeat

I run a restaurant making above 100k income

Above 150k combined with my lady

I know i have many routes to get there on how much i can pay down or save up yearly and pay cash

Any opinions 

Im in south texas and would like to stay local and in my backyard i would get C and B- nieghborhoods that i know

More then likely once past the 50 single homes ill be stepping slowly into multis afterwards

Thanks in advance!

Do you plan to buy “move in” condition properties? Or do you want to brrr?

But in general, if you want to scale fast you have to leverage. So saving up money and paying 100% of the cost is going to take long. Save up just enough to pay the down payment. Or use your home equity loan for the down payments on multiple properties. 

@Jorge Leon Jr It sounds like you have conflicting goals. You want to pay down the mortgages yet you also want to scale quickly. Your 8-10% goal of ROI should be doable if you borrow to buy. If you want to pay all cash you will do much better but won't get to 100 units.

My suggestion, ignore making a plan for 10 years from now. Get one deal done and financed. They see how you can do another one.  Once you are in the game you will have a MUCH better perspective on how to proceed.

i am buying my first property roght now will be move in ready , owner financed  at145k and put in a renter at 1600-1800 rent and will pay it down as fast as possible within 1 year but my main goal with property number 1 is to gain equity and then do  equity cash out loan and then multiply from there with sub 100k properties

And then from there if i purchase 5 houses thru loans not sure if to pay down loans or keep buying additional houses with 20% doan payments 

I know after i hit limit of 10 loans ill be paying off smallest loan and buy 1 more and repeat that for a while

Once i have 10 propertys paid for sure probably will step into small multi’s 2’s 3’s 4’s

The restaurant is mine for sure income wont go away so i wont be dependent on cash flow from rentals to live off of with that wxcess money will be going towards smallest loan to pay off quickly 

Am i on the right track here with my thoughts?

@Jorge Leon Jr Having goals is good but life doesn’t always go according to plan especially that far out in the real estate game . As mike Tyson says “ everyone goes into the ring with a plan , till they get punched in the mouth “

I don't understand paying off loans quickly and then turning right around and refinancing them.  Just skip the hassle and cost of an early payoff and refinance and use the money for the next down payment instead.  A refinance only helps if you are adding value.

@Mike Dymski the reason i say pay off loan quickly and equity refinance loan is to purchase more property with that same money but on loans... here is my game plan house number 1= 145k value plan is step 1 pay it off asap Step 2 equity cash out loan 120k give or take step 3 purchase house 2,3,4,5,6 on loans with downpayment cash from equity loan step 4 use excess money to pay down smallest loan quickely and repeat step5 equity cash out loan use that money to purchase house number ,7,8,9,10,11 in essence OWE 10 Houses at 100 cash flow VS Own 1 house at 1000 cash flow and buy cash to 10 Properties what is better long term that is my mentality but i know rates are HiGH at the momenT

@Jorge Leon Jr

the reason i say pay off loan quickly and equity refinance loan is to purchase more property with that same money but on loans...

You are fooling yourself. It sounds great but read some of the posts above. Life doesn't work like that. 

More importantly instead of waiting until you pay off the entire loan on the first house to by the second batch. Save the extra money you would use to pay down the mortgage and use it to buy a second house much sooner. The cash flow from that second house will make the third house come sooner etc. Not only will you build faster you will save the cost of the refinancing. 

This sounds like something @Joe Villeneuve would comment on

@Ned Carey So it would be better to buy 1 pay off buy 2 pay off buy 3 pay off buy 4th pay off.. As apposed to pay off 1 equity cash out to buy 5 homes with that down payment .. My finance lendee guy at the bank said its possible to a certain extent (number of loans) and income wise to which i have down with main job either way he did mention might be over paying alot interest wise since rates are abit high and it would take ..

Thanks @ Ned Carey .

First mistake.  Focus should NEVER be on the number of properties.  Focus should be on the number of dollars.  After reading the original post, it appears  

@Jorge Leon Jr would rather make $100/m per door, instead of $1000/door.  That makes absolutely no sense at all.

Second mistake, thinking that 100 properties at a lower return is a good thing, as opposed to 10 properties with a higher return.  See First Mistake.  That makes even less sense.

Third Mistake.  Thinking that the plan laid out is using the same money over and over...but it isn't.  Using the same money means paying for it once with multiple uses.  In this plan, @Jorge is using new money for each purchase, and paying for it twice.  Once, in cash by paying off the previous loan (that's money out of his pocket), and the second time with new interest.

Forth mistake is thinking that paying off a loan is a good thing...which it isn't (unless your tenant is the one doing it from the rent payment).  

When the tenant is paying the house off (positive cash flow), what the REI "paid for" the property is ONLY what comes out of the REI's pocket...which would be the down payment. When the REI adds money from their pocket to accelerate the payoff (i.e...helps the tenant buy the house for the REI), that added money adds to what the REI is paying for the property.

Profits start when all of the money the REI paid for the house is recovered through the cash flow. When the REI takes money out of pocket to accelerate the payoff, all they are doing is spending more money out of pocket to buy the property.

Fifth Mistake.  Why would you pay off a house, out of pocket (cash = free money), then borrow that same money back at a cost (interest on loan= not so free money).  Then continue to repeat these steps over and over.

Sixth Mistake.  Not running all the numbers.  What I see is this:

a - 10 houses at $100 cf/each = $1000 cf/month total
b - 10 houses = 10 new roofs, 10 new kitchens, 10 new...etc..., but still only $1000/m to pay for them
c - 1 property at $1000 cf/m = $1000 cf/mo.  (Tell me again how owning 10 properties at the same income is better?).
d - 1 property = 1 new roof, 1 new kitchen, 1 new...etc..., but you have the same $1000/m.
e - Thinking that in this plan there is any "excess money".  There isn't any.  All the money that is "manufactured", is done at a price (cost to the poster).  All the new money isn't free money, and is actually going backwards.

I'm a firm believer in what the poster is "trying to do", but this is not even close to the way to do it.

As your lender advised you; “’s possible to a certain extent.”  To a certain extent.

To use an expression I’ve read from other BP members; "You’re getting lost in your numbers."  

Remember that scene where Tom Hanks playing the role of the pilot Sully (who ditched his plane in the Hudson) testified that the “human factor” hadn’t been considered by the various computer simulations that indicated the plane could have been brought back to the airport. I've invested in many SFHs and have done some of what you’re proposing, but the reality is – well reality.  It just doesn’t unfold the way you’ve laid it out as an optimal scenario – what your “simulation” is stating.

@Joe Villeneuve laid it out best and the advice I’ve gleaned from him in past posts has helped me rethink my strategy.  What he's presented can help you formulate a better strategy. 

Ambition is beautiful;

It’s confident, 

can inspire...

Is Hope with tools.

Success is spiritual;

Is serene,

Benevolent and kind...

Assuages no fools.

That’s the hour talking here in Northern California! I am a newbie to this site and am finding lots of food for thought. I like this Texas couple’s dreaming and hope that the writing down of goals is encouraged. I am on this site to investigate other sources for my children to turn. I want them to feel like the world is their oyster. I hear their excitement and ambition. It’s great. 

It’s also okay to recognize foolishness when we discover it in our thinking. And I’m not sold on Texas’ thinking as being foolish - yet. 

I just want to ask Joe V.: what if his strategy isn’t fully expressed/stated? Maybe he recognized he’s in a highly appreciating market in his area and he’s not in it to hold what he purchases; just control as much as possible, ride a three year projection of appreciation, then exchange into the one large-roof-multi-units?

@Joe Villeneuve So by reading i should shoot for cashflow more then anything and just buy property cash?.. instead of having 10 houses on loans at 9% ROi after a 40% expense deduction im guessing will be 100 dollar cashflowing.. Vs if 1 house is fully paid for bought cash and cash flowing 1000 after expenses and just wait to buy next house cash vs using leverage via equity loans?.. My mentality on my original post is using leverage to buy more property quickly vs waiting for to get cash to buy next one (i know i know less risky this way).. Yes more risky having many loans but my main income is not going away.. Im just trying to speed up #of properties by the time 10 years rolls around ( i have X amount of properties paid off and cashflowing without mortages and that were cheaper 10 years ago when i bough compared to 10 years in the future) .. I hope i make sense here .. i really am trying to

I'm really having a hard time following what you are doing.  My guess is because there are a number of gaps in the flow of the money.

First, forget the 100 rentals.  You'll either go nuts trying to manage them, or you'll spend all your cash flow paying someone else to (see next item).

Second, forget a minimum of $100/rental.  You'll probably have half of them negative CF per month with only $100 buffer per month.

Maximize the cf per property at the same time you are spending less out of pocket per property.  It doesn't make sense to increase your cash flow if you have to spend money out of pocket to do it.  It does make sense to leverage for CF, and to recover cash you put into a deal, but only if the cost of the cash (to you...not to the tenant through rent/cf) is less than the income/cf it generates on the next deal.

In your examples/plan, it goes backwards.  You are spending money faster than you are recovering it...and you are lowering (or at least not increasing) you cf in the process.

Run ALL of your numbers, in sequence, as it is used.  Include costs, who pays these costs, when, and the returns on a timeline.  As you do this, keep a running total of where you are as far as cash flow and cash through the timeline.

Follow the money.

@Joe Villeneuve So in essence dont go for many houses at once and just buy out right when able to and repeat... Im just trying to expand to more properties using equity loans instead of paying cash for houses so i can increase doors faster.... i kept it short to make sense its not letting me space out responses

That's not what I'm saying.  It teach, and do, what you are trying to achieve here.  You're just not doing it right.

What you need to learn is:

1 - how money works
2 - How to use the same money over and over...paying only once for it
3 - The difference between "cost and expense" as it applies to items 1 and 2

@Jorge Leon Jr I've been contemplating the same quandary. For me, and probably you as well, I think a hybrid between cash and debt makes a lot of sense as follows, with reasons attached:

If you can, always buy cash. Helps with competing offers, it's more flexible, generally smoother process. 

As you go, finance properties after you've rented them out, but not all of them. That's what I mean by hybrid. Leverage some to 80%, especially those that are worth more... It makes no sense to leverage two 100k homes if you have one 200k home. If the market tanks, you have stored leverage in your cash properties still. By having some bought cash and others leveraged you can reduce your risk and keep your financing costs to a minimum. Employ the law of averages while segregating each home individually. It's also a lot cheaper to refi one home when rates drop than it is two homes. 

Buy fixers. Get that 20% equity up front if you can, which allows you to roll your money back out, and it keeps your leverage and risk down by default. Don't buy turn key, ever, unless you're at a point where you don't need to scale as fast. 

I think you have to emphasize the sweat equity aspect of the business up front on your first 3 or so deals. Lots of work, but that's your snowball effect and risk mitigation right there. After you have a stabilized portfolio up and running you can look for deals that CF well without a significant equity component up front. (By then the entire landscape may have changed anyway.) You'll also have more credibility with lenders once you have a track record of success. 

That's my plan. Who knows where this market and economy are going? Keep some buying power on hand and leverage carefully, but you SHOULD leverage. Watch your equity ratios. Good luck! 

@David Smit thank you for seeing what i am seeing ... for sure my forst 2 or 3 properties will be paid down as quickly as possible and work yp from there using leverage as i plan to but then again if the market allows by that time! Thank you david for your insight