How do I get started with building a rental portfolio?
Member since 2020 · 3 posts · 0 votes
If you had $250k ready to invest, how would you invest it to get the best returns as well as build a portfolio? Fix and flip, BRRRR, or leverage the money to get a 1M+ rental property? My friends and I make decent money from our jobs so we won't be dependent on the cash flow it generates. The plan right now is to do a BRRRR with a 200k property and learn from it. I like the idea of not having money tied to one property and keep it moving. Any advice is appreciated.
@Summit Aryal Hi Summit. I agree with some of the things the others have posted. I think a SFH might be a good starting point for you. If you are investing with friends the first thing I always recommend is a partnership agreement that has a solid exit strategy. I was involved in two deals that soured because of not having partnership agreements. The first ended up in a court case that cost me tens of thousands of dollars to dissolve the partnership. The second was a restaurant with the property. The bank and its lawyers ended up removing the partner who had abandoned the deal.
So. As a beginning investor a BRRRR makes lots of sense. It might be better to try to buy one that has more cosmetic issues than real structural type issues when you are starting out. These will cost less to repair and will also be easier and take less time to complete. This, your house will be rentable much quicker.
If possible buying something built after 1990 is probably better because it will be less likely to have major problems than a house bought in the 1950s. Depending on where you are located this may not be possible.
Different banks will have different seasoning requirements for the refinance process so you may not be able to get your money back out for 6 months after you purchase it. If the bank you got your original loan with (assuming you have a loan and didn’t pay cash) tells you 1 year for a refinance keep looking. Some banks WILL do 6 months.
Best of luck!
Summit,
Congratulations on your pending investment. There are many ways to invests in real estate that can produce a great return. A lot depends on your personal preference. Having said that I will give you my initial thoughts. I would think that fixing and flipping would not be my top priority in your situation if you (and your partners) do not need the cash (plus tax implication). I like the idea of buying cosmetically distressed properties, rehabbing them, and then renting them out for positive cash flow.
In your situation you are in a position to buy properties by paying cash which gives you an advantage. Especially if you are buying a property that will not qualify for a normal mortgage because of its condition. I am currently rehabbing a property that I bought with a cash offer. I find that I can normally beat out other higher offers because my offer is not contingent on financing. After you complete the rehab that you could pay for out of pocket then you could finance the property and rent it for positive cash flow. I would keep my loan on the property around 70% or lower of the after repair value which gives you a cushion if the market changes.
Your plan should also be based on how involved you want to be in the business. Do you have a property manager, maintenance crew or person, and others in place that can handle the day to day details or are you or your partners going to be handling things? In my experience I have found that Single family homes require the least effort to oversee, while apartments come with more headaches. More work in the management is not an issue if you have that covered. Hopefully something I said helps.
@Summit Aryal thanks for the post. Always great to hear from a fellow Texan. Did you know that there are several real estate investor groups that meet here locally? We are always talking about different techniques and methods to investing. It might be good to get connected to some to hear what other people are doing in our market.
Now, I would recommend starting in something a little less risky. Meaning, do you and your friends own you own primary homes? If not, let's think about that. If you do, then maybe think about buying a turn key, move in ready property. When you buy off the MLS there are all sorts of protections in place to help you be more successful with your purchase. Also, how do we know you will even enjoy owning a rental property? You might hate it. So, starting with something that doesn't need work usually helps us understand what our tolerances are. Likewise, all of the items you mentioned above are all "active" types of real estate investing. You can also be a "passive" type of investor as well.
Hope some of these ideas help in someway. Feel free to reach out if you want to brainstorm some more. Thanks!
Summit,
Given your situation, the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) seems suitable. It allows you to invest in a $200k property, learn from the process, and not tie up all your funds in one asset. This approach offers learning opportunities and the potential to recycle your capital for future investments. While fix and flip can offer quicker returns, it also comes with higher risk and requires more active involvement. Leveraging $250k to invest in a $1M+ rental property could yield higher returns but also involves greater risk and debt. BRRRR strikes a balance between risk and learning, making it a good starting point for building your portfolio
@Summit Aryal Hi Summit. I agree with some of the things the others have posted. I think a SFH might be a good starting point for you. If you are investing with friends the first thing I always recommend is a partnership agreement that has a solid exit strategy. I was involved in two deals that soured because of not having partnership agreements. The first ended up in a court case that cost me tens of thousands of dollars to dissolve the partnership. The second was a restaurant with the property. The bank and its lawyers ended up removing the partner who had abandoned the deal.
So. As a beginning investor a BRRRR makes lots of sense. It might be better to try to buy one that has more cosmetic issues than real structural type issues when you are starting out. These will cost less to repair and will also be easier and take less time to complete. This, your house will be rentable much quicker.
If possible buying something built after 1990 is probably better because it will be less likely to have major problems than a house bought in the 1950s. Depending on where you are located this may not be possible.
Different banks will have different seasoning requirements for the refinance process so you may not be able to get your money back out for 6 months after you purchase it. If the bank you got your original loan with (assuming you have a loan and didn’t pay cash) tells you 1 year for a refinance keep looking. Some banks WILL do 6 months.
Best of luck!
@Summit Aryal you're sitting at a great spot because you have options. If you have the time and don't mind spending the effort then BRRR or fix and flips would be the way to go. Some of the specific finishes may vary depending on which route you go but the underwriting will be about the same so if it was executed property you could go with either option.
If you want to go the passive route because you don't have the time or want to spend the effort then long term rentals isn't a bad play either. I work with hundreds of investors who prefer this route because they choose to be experts in their own field and don't want to learn a new one, in real estate.
You're in a great market to be investing in, especially if you aren't worried about cash flow. The real money is made through the appreciation. Best of luck on the journey, let us know how it goes!