I have a philosophical question for you. I started purchasing 3 years ago, and bought a SFD, then last year I purchased 3 SFD's, and this year I have been fortunate enough to purchase 32 units in a few different great finds. I'm not a rich guy with a ton of cash sitting around, and I'm a little nervous about the economy and what can happen over the next few years. My rents can basically cut in half and I'll break even...and I only buy in primo areas...so the questions is...
keep buying or pause and save up a ton of cash for a rainy day?
I think at some point you should be accumulating a large wad of cash, and it sounds like you fit that category perfectly. If you have 30+ units, that all cash flow well, there is no reason you shouldn't have a massive bank account in no time. If you can survive 50% vacancy without spending your cash on hand, you have fantastic cash flow and should be concentrating on amassing some capital.
I guess it depends on what lifestyle you would be content and happy with. I know that most people will initially invest in the begining for cash flow. As the income becomes self supporting people tend to seek a hands off approach and look for a property managment company to take over.
After that things pay themselves off and your bank account swells faster then you can spend. It sounds like your on the right track it just all depends on if you want to passively watch the growth or further influence it
Way to go
@Jack Chamberlain First and foremost congrats! As others have said.. What are your goals? This question is only as true as how big your goals are,
This is a personal decision. You've acquired most of your units this year. If I were in your position, I might let some water run under the bridge for a while. Learn a bit more about managing 30+ units (and tenants). Improve units that have deferred maintenance, raise rents where needed, and bank some cash flow.
At the same time, I'd keep my eye open for homerun deals, and not turn them down.
I agree with above posters. What are your goals? If you have enough to be financially independent, I would focus on saving up for only home run deals moving forward. You can afford to be patient and more picky. Plus with the purchase of those 30+ deals you have experience to know what home run deals look like.
Here's what I would add to the above. If your deals are that good where you can break even at half the rent amounts, then why stop? I actually had a lender pull me aside a couple of years ago and say, "Mike, we've been in the business awhile and I'm gonna share some advice for what its worth." In my mind, I'm thinking, here we go, he's gonna cut me off or tell me I've got too many houses or something.
Then he starts in and says, "You're on quite the run right now. And some of the deals you're getting are really good. You need to buy everything you can get your hands on at these numbers because the run is not going to come to an end at some point and you may never be able to get these types of deals again"
And I think thats the advice that really pushed me over the last couple of years to really attack my investing.
So to pass it on. I would say. If you're finding deals that good, I don't know why you would want to stop. There's clearly enough room in those margins to bring in a PM. So if its about how many can you handle and you're at your limit, just keep buying and turn those new ones over to a PM company for awhile.
Or maybe do a partial arrangement. You lease em up. They manage em. Just enough to take some of the workload off.
But keep buying. I don't think you're going to find anything else out there that comes close to the numbers you're obviously getting. And, where I'm at here in Illinois, thats exactly what I see. Everyone always assumes that the next logical step is to jump up to multifamily. But I look at the numbers there and they just don't make sense to me.
I can get into houses worth 130k to 150k at 70% to 75% ARV that rent for 1300 to 1400/mo. So I'm all in around 90k to 110k on most of my deals these days. But the 4 plexes down by me are all going for 80k a door or more. And the rents are only 850 to 900 for the units. It just makes no sense.
Not only that but then I figure the turnover is going to be a lot higher for the 2 bedroom, 800 sq ft units compared to 3 or 4 bedroom homes at 1,300 to 1,800 sq ft.
And that is one of the concerns I would have with the management and growth. If you're self managing and your time is a concern, I have to believe that the SFHs are going to be much easier to manage.
Now maybe if you're someone with the capital to invest in a larger multifamily where you have on site management and maintenance, then that may be another option. But that stuff by me is even worse in terms of the numbers.
I believe Dimtriy Fomichenko, Brian Eastman, and Sean McKay With Americanira.com would all do you well. These guys all know what they are doing. If you need any guidance on real estate investing then that is what I do very well. You are welcome to read my profile and reach out to me if you have more questions.
Hmmm. I guess thats the one thing I never really understood. Using a self directed IRA to invest in real estate. That seems to contradict the value of investing in real estate.
If I buy an investment property with after tax money and put down say 10k. That equates to about 13k or 14k in pretax monies. But now, going forward, most if not all of that rental income is going to be tax free for quite some time (7 to 10 years maybe). At some point, then some of it will start to become taxable.
If you buy from an IRA, and use that same 10k in pretax, you save a little bit there. The rental income, I'm assuming, is always going to be nontaxable until you pull it out. But when you do pull it out, its going to be taxed as regular income. Thats the part that gets me. Aren't you losing that tax-free gap of 7 to 10 years?
Not only that, but you can't get to that money until you retire, right?
Eventually, the mortgage gets paid down to nothing and you end up with a house worth 250k. But when you try to get that money out from an IRA and sell the house, then you'd have to pay taxes on that as regular income right? Versus if I had it in my name or some entity and I sold it, I'd only have to pay long term capital gain, correct. Or better still, I never sell it and then I never pay taxes on it. Or I 1031 it into something else to make me more income and I never pay taxes on the appreciation.
I guess I just dont' understand why you'd ever want to use a tax deferred type of vehicle like an IRA to invest in real estate. When real estate is already one of the best tax investment vehicles on the planet. Where else can you get "paper deductions" on a property that allow you to offset income when the real value of the asset is actually increasing?
If you aren't comfortable, starting building cash reserve. Decide how much you need in the bank to be comfortable. Once you hit your goal, go back to buying. But if it's just fear and there is no justifiable reason for it, then keep buying.
Congrats @Jack Chamberlain ! Do you currently self-manage? I am in that boat. Big enough to get real busy at times, but not large enough to hire full-time people. It's easy to sit back and get content or complacent. Funny, when not actually out there seeking more property, good ones can come to you. Harvesting seeds planted from long ago.
I do like @Jon Klaus mentions, give myself permission to take the foot off the gas, build equity and cash, but don't pass on a great opportunity. Sounds like you've had a few of those already!
Regarding IRA investing - I would reserve that for highly taxed (or not tax-favored) activities like flipping or wholesaling. No reason in my opinion to put a highly tax-favored activity like buy and holds in an IRA. I know you didn't ask about it - just for general info. Cheers!
I've seen some good videos on this topic. They recommended building your net worth to critical mass then rolling your portfolio into Notes that yield the cashflow that you want to live on hassle free.
Example If you had 600k net worth and can find 10% yield notes... that could provide 60k income annually from interest alone. Then take the principal portion that you receive and keep that rolling back into new notes.
So then you work backwards... say you want 100k in passive hassle free cashflow for your retirement. IF X * .10 = 100k solve for X = 100k / .1 and X = $1,000,000. Basically you would want to keep investing until YOUR critical mass is reached of 1,000,000 in net worth. If you are ready to retire you can then start rolling that 1M net worth into notes that yield at least 10%.
On a side note... NOTES are really good to hold in your self directed IRA/ROTH IRA.
One could build both a rental business while building their note portfolio in their IRA/Roth IRA in preparation for their retirement.
I really like The Bald Guy's 4 pillars of investing videos on this.
keep buying and looking for those great deals and use those to hedge against the rainy days considering you own these properties free and clear with no financing also look for deals were you walk into equity say if it's 20 percent under market value great tool to hedge against a rainy storm also put money into other things such as stocks or reits
Like others have said, I think this is a great time to reflect back to your goals and assess your situation relative to those. If your 30 properties cash flow for more than enough to make you happy, why take on the additional stress of adding properties when you've already gotten to a level that will provide for you long-term?
Now, if the hunting for properties / adding to your portfolio is the part that makes you happy, sounds like now you have the freedom to continue down that path.
congratulations! Sounds like you have buildt a nice little portfolio. If your meeting the 50% rule you are pretty well insulated against a economic downturn. Are your properties diverse? Do you own in several different areas to different types of people in different industries? As an example I worry that investors just getting into some TX markets will have diminished returns due to low energy prices.
If you have concerns, maybe you can begin building cash and and only Persue the very best deals and ones that provide some diversification to what you already own. If you have a large college or university you might consider a student housing property as an example. Students tend to stay in school longer in weaker economic times.
I have a buddy with 130 units and he said it best... time will tell if I have been very right or very wrong. if it's the latter, I will have nothing since I invest heavily in real estate.
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