Investors: Don’t Shoot for 100+ Properties. Aim for Bigger & Better With THIS Strategy.

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Buying more and more properties might seem like a great idea — but is it really? If you’re looking to build wealth and passive income through real estate but don’t want your investing business to take over your life, this strategy might be for you.

There’s a certain sexiness to being able to say, “I own 100+ homes.”

I get it. It’s cool. In fact, it’s an incredible accomplishment. Most people only ever own one home at a time, and most people struggle just to pay that off. But just because you own 100 homes doesn’t mean that you are running an optimal real estate business. It doesn’t mean that this is a brilliant strategy or that it would even be helpful to others. And it shouldn’t be pushed on others.

This topic frustrates me because I was briefly sucked into this line of thinking — that I should start sourcing deals and buying as many single family homes, duplexes, triplexes, and quadplexes as I could get my hands on (good deals only, of course).

Today, I am diametrically opposed to owning 100 homes. I think it’s a foolish and dangerous path for someone like me. I think that instead of building myself a retirement, I would be building myself a tangled nightmare of management that would need a business built around it.

See, I work a full-time job and invest on the side. Every structure produces more management, paperwork, and maintenance for me, and if I pursue the “buy more deals!” approach, then every additional structure has less and less of a significant impact on my financial position.

I think that there are far better alternatives to purchasing dozens or hundreds of properties that better serve the primary objectives of most investors like me — those who want stable cash flow and a strong return on equity with relatively little active management on the part of the owner.

While there are many ways to get rich through real estate, I prefer a path that involves far fewer physical pieces of land and structure. I don’t want 100, 50, or even 10 properties. But I do believe that just one or two properties is too few.

buy-hold-retirement

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The Magic Number of Properties

I think the magic number is seven properties — and that investors should think in terms of buying, holding, and shedding properties with a holding period, on average, of seven years.

Let me explain.

I plan to purchase approximately one to two properties every year to 18 months, forever. I plan to purchase a larger and larger one each time, using the cash flow and/or equity of my existing holdings and any savings from my job/other investments to finance the transactions.

In November 2014, I purchased a cheap and run-down little duplex in an “up and coming” (read: not the nicest) part of town, moved in, fixed it up, rented it out, and have now moved out.

In March of this year (16 months later), I purchased a less cheap and run-down, slightly bigger duplex in an “OK” part of town, am fixing it up, plan to rent it out, and move out in a year or so.

At that point, I’ll try to buy a bigger, nicer property in an even better part of town, fix it up, rent it out, and repeat.

Related: Big, Fast-Growing Businesses Are NOT the Ticket to True Financial Freedom: Here’s Why

See where I’m going with this?

Each time I purchase, I expect to buy bigger, better, more expensive, and more profitable units, until the end of time. This obviously means that I won’t be buying duplexes in a few years and will move on instead to small commercial properties and hopefully one day, onto large ones.

At the end of these first seven purchases, I’d hope to be an owner of between $3-10M in real estate assets, with the portfolio leveraged about 3:1 across the average of the seven structures. I know that realistically speaking, some of these purchases might be months apart, while others might come with years in between. But the goal is to get to about seven properties in seven years, each larger and nicer than the last.

Why This Approach?

There are three reasons why I think that this is a fantastic approach for the part-time investor working a full-time job, and that’s what the bulk of this article will be about. Please note that I have not yet carried out this plan, and the real world will likely disrupt and alter this plan as opportunity and tragedy are wont to do. But the principles of the plan have and, I believe, will remain unchanged, even if the exact numbers play out in unexpected ways.

With that said, let’s get to the three reasons that I think that the ambitious W2 worker should consider a real estate strategy that involves purchasing just one property every year or so and selling off the older properties approximately every seven years.

Reason #1: A portfolio of seven properties gives the investor an excellent balance of both convenient management and diversified risk.

Let me tell you something about real estate. A secret. I don’t like real estate. I don’t like the physical structures of the duplexes, I don’t like doing yard work, I don’t like fixing toilets, I don’t like working with contractors, and I don’t like dealing with problems.

I think that I and another writer on this blog, Ben Leybovich, would agree on that.

Sure, I have some nostalgia for my first duplex — it was my home, I worked on it, lived it and breathed it. But no, I don’t really like the real estate itself. That said, I do like the income streams it provides. I do like collecting $1,000 per month currently. I did like living for free. I do like building equity.

And I do like the idea of SCALE.

As I mentioned, I think that when most people think about real estate investing and becoming a big player, they think about owning dozens or hundreds of properties and building an incredible management company to manage them.

Not me.

If I had my way, I’d own ONE big apartment complex. Just one. Why buy 500 houses when I can buy one 500-unit apartment complex? THAT’s a massive passive income stream I can get behind. Sure, the problems are bigger, but you can solve 500 of them at once! Talk about efficiency. Talk about scale.

By the way, It’s also likely to be much easier to sell, contrary to popular belief. Sure, selling a single family residence (SFR) is easier than selling a 500-unit apartment, but selling 500 SFRs has got to be WAY more work than selling one 500-unit apartment.

On the other hand, having my entire real estate portfolio in one giant apartment complex is a bit of a risk. What if the holding company that owns it gets sued? What if it burns down? What if something goes wrong with that specific location?

I understand that having all your eggs in one basket is a risky endeavor, and that’s why I want to get to this magic number of seven properties.

The best part is that once I get to seven properties, I can still continue scaling, contrary to popular belief. I will do so by selling either the first property I acquired — or the one that is the least productive or the biggest pain to manage.

I’ll take any equity I get from that sale and simply exchange it for a larger, nicer property, simultaneously plowing any excess cash I might have lying around into the next, seventh investment.

Back to seven properties — just with one that is bigger, nicer, and (hopefully) less of a pain than the one I just sold.

leave-job-entrepreneur

I can rinse and repeat this forever, with the end goal of owning seven incredible 500+ unit complexes in excellent locations.

How does that sound? Sounds like a pretty good goal to me.

If I ever achieve that end goal with a controlling ownership interest, I’ll probably be an old, old man. But that’s the great thing about this process — there’s always a next step, from the slightly-less-beat-up-duplex to the $1B skyscraper downtown. I can stop whenever I want to, or never, and even if I stop in just 10 years, I’ll have a huge net worth and a real estate business that is way less of a pain to manage than 100s or even 1,000s of scattered SFRs.

Related: 3 Success Factors That Separate Thriving New Businesses From Failed Ventures

Reason #2: Real estate investors should expect to releverage every seven or so years to maximize the benefits of both appreciation and stable cash flow

This is an analysis for the math whizzes out there. Earlier, I mentioned that you can scale by selling off early purchases in exchange for larger, nicer, and newer ones. Here, I’ll tell you why you should do that, or at least why the math suggests that you should.

When you invest in real estate, you benefit from two things:

  1. Income
  2. Appreciation

Now, when you leverage (buy real estate with a loan) with 20% down, you can purchase a property roughly 5 times larger than you otherwise would. The effect that this has is that it immediately compounds the rewards and risks of real estate fivefold.

Think about it. If you have $100K and buy a property for all cash and it appreciates 5%, you’ve made $5K. If you have $100K, get a loan for $400K, and buy a property for $500K that appreciates 5%, you’ve made $25K.

Now check this out — this is an analysis I put together analyzing the effects of leverage on real estate returns and how they compare to the stock market. I use historical averages — in the real world the returns would jump and dive all over the place rather than produce the smooth curves in the model, but this is useful in terms of looking at how an average real estate investor might plan his strategy over the very long term. You can download the model yourself for free if you want to challenge or tweak my numbers.

In this analysis, we talk about a $62,500 property purchased with $12,500 down and a $50,000 loan (leveraged at 4:1). But the math works with everything from this tiny purchase to real estate into the hundreds of millions. Let’s look at two graphs produced by the model:

Impact_of_Cash_Flow__Appreciation__and_Leverage__1__xlsx

Impact_of_Cash_Flow__Appreciation__and_Leverage__1__xlsx 2

  • Notice, first of all, that unleveraged real estate (the blue line) performs worse than the stock market (the red line) over time, on average. Leveraged real estate, on the other hand, typically performs much better than the stock market over the first decade, and then produces lower than average returns after that as the portfolio de-leverages.
  • Notice, second of all, that leveraged real estate produces less cash flow than unleveraged real estate at first, and indeed, less cash flow than the dividends typically disbursed by stocks in the S&P 500 index on an equivalent investment. In fact, it’s about halfway through that seven year timeframe we talked about before a leveraged property will, on average, generate cash flow in excess of the two alternatives shown here.

One thing that is important to note with leveraged real estate is that with every passing year, you deleverage. As you deleverage, increase rents, and operate more smoothly, your cash flow increases and soon surpasses the cash flow of the unleveraged purchase, while your return on equity decreases.

I suspect that many moderately wealthy real estate investors suffer from this paradox. On the one hand, they are paying off their notes and getting some great passive cash flow from their investments. On the other hand, they’d actually be better off from a return perspective if they just sold their de-leveraging properties and invested in the stock market, or better yet, re-leveraged. I can imagine that in real life, that can be a tough decision if you hadn’t planned it out like this and done the math ahead of time. Still, less-than-optimal cash flow on a high net worth isn’t the worst thing in the world! But I digress.

The key points here are these:

  1. Leveraged real estate produces greater returns on average than unleveraged RE.
  2. Leveraged RE produces less initial cash flow than unleveraged RE.
  3. Every year, the effects of loan amortization and appreciation cause you to deleverage.

The conclusion I draw from all of this can be summarized thusly:

I want to get the highest total return I can, while stably and somewhat passively managing my investments. Therefore, according to the math and common sense that are most apparent to me, I must commit to continually re-leveraging my holistic real estate position, have relatively few structures, and manage my portfolio such that I have comfortable cash flow at all times.

So, given that objective, when is the best time to re-leverage, on average?

If you’ve noticed a theme of seven in this post, you got it.

On average, I should expect to re-leverage my real estate position every seven years to maximize the benefits of both return and cash flow.

When it comes to re-leveraging I have two choices. I can either refinance the property and take cash out, or I can sell a de-leveraging property, take the entire net proceeds, and use it to buy a larger property with a larger loan.

I believe that given my goals, the smart thing to do in my case is to sell the deleveraging property and buy a bigger, better, newer one with the proceeds (tax-free, too — but that’s another story). I can then repeat the process roughly once per year and continuously sustain a favorable leverage position for my portfolio in the process.

Reason #3: Owning seven properties and purchasing/refinancing real estate once per year is an excellent blend of cyclical activity and gradually increasing challenges for the part-time investor.

Remember how I mentioned that I don’t like real estate? Well, that’s only partially true. I like solving problems, I like learning, and I like being able to say that I produced something. I like seeing the results of my hard work. But I don’t like solving the same problems over and over again. I don’t want to keep screening tenants for years and years.

Related: What Real Estate Investors Can Learn from Facebook’s Long Term Mindset

I want to train someone else to solve problems that I’ve already solved. Then, I want to train him/her to train others. That way, I can go on to solve new problems every day.

See where I’m going? Let me put it another way:

Every property purchase involves hard work, discipline, and tests a variety of traits. I have to be analytical, good with people, a marketer, a salesman, a legal team, a CPA, and everything else all at once.

I like that.

What I don’t like is having to do that year round. Some people do, and that’s why they build huge portfolios involving hundreds of properties. They like pouncing on every good deal as it becomes available and making it work. But that’s not me.

I’m investing in real estate to build passive, massive wealth, on the side, and in my spare time.

I’m happy to give a couple weekends and weeknights per year directly to this cause and to read and learn and network and plan my next move year round. But I’m going to build my wealth through my career and by following my passions, the proceeds of which will then be invested in real estate.

conventional-loan

One transaction per year is plenty to satisfy my hunger to build my business, but not so much that it will overwhelm me and become a second full-time job.

Lastly, let me note another advantage to this “seven properties” approach from a cyclical management side of things. That advantage is that I can pick and choose which properties to keep and sell.

Perhaps one property is slightly less leveraged and therefore performing slightly suboptimally, but I’ve got great tenants in there. Or suppose I have a potential awesome exit in a few years where I could knock the property down and build a bigger building. Or maybe the property is in the way of eminent domain and the government might buy me out.

In any event, I can just sell the next property, the one that has terrible tenants and is a constant pain in my side, but is technically performing better, or is next to the big factory that’s being built, or is just a painfully long drive away.

Rather than just having one property, I now have choice, and I can use that choice, coupled with the stable cash flows from the other properties, to make a decision that makes sense given my portfolio and personal situation.

Conclusion

Will this path work for everyone? Of course not. It probably won’t even work for most. But I think it might work very well for those of us who work full-time W2 jobs that we love, but want to build a scalable and minimally invasive real estate business.

Seven properties. Seven years. One property purchase per year. Bigger, better, and more scalable each time.

I want to point out that I believe that this works best when I am making sure to purchase these properties during times when I am well capitalized and in a stable life position. It’s when you have tens of thousands in the bank set aside for your next purchase, are pre-approved or extremely well-qualified for financing, or have other sources of money ready to go for your purchase and few other life or business distractions that you are most prepared to purchase investment real estate.

With my approach, I’m actually NOT interested in other deals, even great deals, at the current moment, and had to turn down a great deal recently on a duplex right in my hot zone. I turned it down because I’m currently in the middle of stabilizing my second duplex. I’m giving that my total attention, and my next purchase is at least six months out, and that’s only if I stick with the small multifamily stuff. There is ALWAYS another deal down the road, and I am following what I believe to be a smart, yet intentionally boring seven-year plan to building wealth through real estate.

An incredible, exciting deal at the wrong time is not a good deal for me.

I hope that this is a sustainable, long-term approach to building real estate wealth with stabilized businesses that will both grow and help me grow over time. It’s not for the aggressive entrepreneur, the man who is close to losing everything and needs to provide for his family TODAY — or for those who do not intend to scale over time.

But if you are looking for a passive approach that rewards limited hustle, lots of networking, a commitment to self-education, and financial discipline, this might be great for you as well. I believe that an approach like this scales over time and allows one to consistently reach for slightly larger challenges with each passing year.

Personally, I can’t think of a better way to invest my money and my time.

Investors:

  • What do you think of this strategy?
  • Are more properties always better?
  • Is this something you think could work for you?

Leave your thoughts below.

About Author

Scott Trench

A longtime fan of BiggerPockets and a Real Estate Investor managing his first property, Scott is the company’s Director of Operations. BiggerPockets is a BIG website, and Scott’s background in finance and big data analysis will be instrumental in the next phases of company growth and in helping to bring the resources of BiggerPockets to more investors worldwide. Scott is passionate about helping others build wealth and serving his community in whatever ways he can. In his spare time, Scott enjoys skiing, biking, and cooking, and he is a lifelong rugger.

67 Comments

  1. Steve Vaughan

    Another really well-written and informative article, Scott! To realize that taking care of and over-seeing 100 properties will be a nightmare so early on is awesome!
    I like your plan. A lot! You are going to be so wealthy it’s mind-blowing. To be able to live and give however you like… Something I’ve realized and I think you have as well, is that deals can sometimes comes in waves or be few and far between. There were 3 or 4 year periods I went without any acquisitions. Then boom – 4 or 5 in the same year. If we keep our end goals in mind and continue to live below our means during the lean deal times, we will be in position to take advantage of, say, a landlord unloading multiple properties. It’s when I’m not really looking at all that sometimes favorable opportunities come along. We reap what we sow. Sometimes we forget that we sowed some good seed a while back! Always stick to your metrics and criteria and don’t become a ‘motivate buyer’ lol.
    I would like to consolidate to larger complexes as well. The ability to hand-pick and train our own on-site management is my goal. Thanks for not suggesting just to sit back and hire a PM. You rock!

    • Scott Trench

      Thanks Steve! I’m glad that you liked the article. I agree completely with what you say here about the “waves” concept. I totally expect some of the purchases to come in waves, and for there to be years of low activity over time. That will allow me to play the cyclical nature of real estate a little bit, and perhaps my life in general won’t be in a state where it is favorable to buy real estate (traveling, volunteering, career, or family life might not support more real estate activity.

    • Kimela Overstreet

      Hi Scott,

      Great article! It provided some insights on how long we should hold our rentals. I have a property now that was impacted by the 2008 economic downturn and it is slowing beginning to gain some traction. I’ve had it since 2003 and wondering if I should sell or wait the market out?

  2. Nice article Scott. I understand you strategy and started out the same way. All I ever wanted out of life was 10 properties that would pay for my lifestyle and soften the blow of a job loss. Then when I got to 10 I realized something … 10 isn’t enough for just about anything. I think your strategy misses some big points:

    There is not much scale or operational efficiencies that you will attain with 7 properties.

    At the 3 to 1 leverage you mention, there is not much cash flow, certainly not enough to eventually replace a job which is the goal of most people.

    Your buy 1 a year strategy misses the biggest advantage of RE and that is cycles. You are essentially dollar cost averaging, not bad for stocks but not recommended for RE. There are times in a cycle where you maximize leverage and buy as much as possible and other times you sit back.

    I have actually found owning and managing 100 properties easier than managing 15. 7 unfortunately is just relatively immaterial albeit if they are 7 large multifamily properties as you mention that is different.

    • Scott Trench

      Thanks Serge!

      I think that my “buy 1 a year” strategy is more like, “average about one per year” and I do plan to try to take advantage of the cyclical nature of real estate (and the cyclical nature of my personal motivation for building the business) with this strategy by bending it and flexibly adapting it to market and personal life conditions.

      I’ll be interested to see if I can generate the cash flow I desire on that 3 to 1 leverage ratio. It is very possible that I am missing some things in my projections and the cash flow will be substantially lower than I hope for at that leverage. I may have to deleverage further to meet my lifestyle goals. Thanks for pointing that out!

  3. Okenna Oparah

    Scott! Always great reading your thoughts. Formulating a long-term strategy that serves my personal priorities (Low hassle, great return, increasing time freedom) in today’s market has been on my mind as I think about how I want to approach my next deal. This has been an invaluable think piece for me. Thanks!

  4. Adam Haman

    Hi Scott,
    I was definitely intrigued by your article. I’m a bit ahead of you on your journey, with 14 units spread over 10 properties here in Denver that have essentially replaced my yearly income, and have been trying to brainstorm a way forward that makes the most sense for me, and I love the idea of having just a few properties and pushing for one great deal per year moving forward.

    I do, however, have a few of the same misgivings as Serge. In 2012-2014 I could purchase what seemed like absolute no-brainer deals, and I pushed my financial and professional abilities to the limits to acquire as many properties as I could during this time. Now that I could conceivably save significant sums for down payments, or sell a property which has doubled in 3 or 4 years to source the next down payment, I can’t see any smoking deals to pour this money into. Cap rates have come down across the board, and, I would argue, are lowest at the highest price points owing to people needing a receptacle to pour their 1031 funds into.

    Also, moving forward there is a likelihood of higher interest rates. Selling a property financed by a 4% mortgage in order to secure a larger one at 6% is a recipe that will cut deeply into expected returns.

    Finally, on your model I might tweak a few of the assumptions as your holdings grow. I imagine you bought your duplex with an FHA loan, which allowed for such a low down payment ($12k) and such a low interest rate. Great move! However, once you are unable to occupy your new purchases as a primary residence, you’ll need to pay higher interest rates than the 3.5% you used as an assumption, and once you have more than 4 financed properties you’ll likely take an additional rate hit, plus have to put down 25% of the purchase price, which changes your leverage ratio. Also, once you go over 4 units you’ll have even less favorable interest rates and larger down payments for the commercial loans this will require. By the time you’re selling your first property, most of the assumptions you’ve made will be inapplicable, and in fact you’ll likely be trading the property you bought on the best terms (3.5% down, 3.5% interest rate, bought in a down market) for a property bought on the worst terms (25-30% down, 4.5%-5%+ interest rate, bought in what is perhaps the top of the cycle). This is to say nothing of transaction costs and the sticky nuances of 1031 exchanges.

    Finally, the criteria of “bigger,” “newer,” “nicer,” and “more expensive” usually correspond negatively with cash flow in my experience. Above $300k here in Denver, we are met immediately with diminishing returns unfortunately.

    Perhaps this might explain a bit why people end up “plateauing” and sticking with the properties they have, as I feel I inexorably am. That said, I’d be happy to be a case study for you if you think I’m missing something! Feel free to PM me if you’d ever like to meet for coffee or a beer and we can hash it out, hopefully to our mutual benefit!

    • Scott Trench

      Hi Adam – this is an incredible comment and could be a blog post unto itself!

      I think the biggest assumption I am making currently is that I will scale into the commercial side of things in a few years. I think that interest rates are at historic lows, cap rates (at least here in Denver) are at historic lows, everyone is super optimistic, and that there is way too much private money out there buying property under management that may or may not be prepared to handle large commercial transactions (low experience relative to the low cap rate and low interest rate nature of this market).

      So, my belief is that TODAY, I would be unwise to do anything other than purchase property that I can comfortably afford and manage in the amount of time I wish to allocate to real estate, and to slowly and patiently prepare for opportunity in the commercial market to appear between 2017 – 2020.

    • Tony McCargar

      Adam,
      Great reply! I live SW of Denver in Durango and we are approaching a very warm market for this summer. My downside is that back in 06 I purchased 3 single family homes all in a row on the same street in Farmington, NM as the Durango market was too high for us to feel comfortable to leverage. My initial goal was to have 10 properties when I retired and sold our business. Then the crash hit and my business went from a sales value of 1mil to 0. My wife and I packed it up and traveled for almost 2 years and returned here a couple years back. We decided to buy into the Durango market as it is a much better market for appreciation and better rents. I get a great cash flow from the houses but I want to get out of that market down there. Probelm, value has dropped from 300k to 200k. Not sure if I should take the hit and move the money into a better market or keep collecting my rents. Sort of like trying to assess when to get in or out of stocks. I personally like the idea of rolling over a property every 7 years as I need that to keep my mind and body going as I have retired and have time available to manage. But ultimately I want cash flow to pay us then leave the RE to our kids. Would love to have a conversation with you as our markets are somewhat similar except for the scale. Thanks again for your well thought response.

  5. Travis Sperr

    Scott, nice article to give insight to what can be accomplished and provide a goal to investors. I too thought less was more when i was getting started, my goal was 15 houses because of the cashflow it would provide should be plenty to “live on”. The more properties I have acquired the easier it is for me to purchase, manage and identify more opportunities. When I started my focus was on low or no money down, but as your portfolio grows and you become a better investor you have the ability to do deals that may not have been possible early on. I have 12 rentals in the Denver market and am finding that the deals only get better with time. A SFR that rented for $1,250 in 2011 is renting for $2,000 now and with long term fixed financing the payment is the same.

    No right or wrong strategy for any investor, different goals, risk tolerances and abilities but the constant is the math. Best of luck to you!

  6. George Wines

    Great article. This is essentially what I am trying to do myself, but Im not sure about the 7 idea. It seems like 7 is an arbitrary number to make sure you arent buying yourself a job. If that is the case I am behind it too.

  7. Chris Emick

    Woh, perfect timing! After only 3-5 deals in (in 4 months) I was already starting to hear a little voice in my head thinking, wait, wait wait….maybe we need to slow this pony down, and then I read this great article. I’ve already set another reminder to re-read the article in 6 months to help me keep an open mind to my current part-time RE investing goals. Your article was put together nicely and it _may_ actually be a good strategy for us as well! Thanks,

  8. Al Bigonia

    Outstanding Scott. I know it has it’s flaws if you think like some of the others. But as I was reading it, i couldn’t help thinking i wrote it myself, and was just proof-reading it. Just wish I had realized this at a younger age. (like you).

    • Scott Trench

      Thanks Al! I know that this strategy is imperfect and that there will be lots of deviations. But I think that if I attempt to walk this path and correct and adjust as needed, I’ll hopefully get to a great end result!

  9. A lot of very valid points. Great advice for for building wealth over time and for a part time investor.

    One thing to consider. I know a lot of REI with over 75 properties and not a single one of them do any labor or daily grind work. They hire it out and have systems in place to walk help through managing the complicated processes like screening a tenant.

    On another note you can have a handful of paid for properties that are easier to manage and also cash flow as well as two or three times as many leveraged properties. But like you say over time the return on your investment is lower so I guess it depends a lot on ones goals.

    • Scott Trench

      Thanks Michael! I agree that there are plenty of ways to go about getting to the same cash flow/ ROI / passive management end goals. Once you have a high profit, steady business, it is possible to systematize it most of the time. For me personally, I think it is more feasible and less intrusive to my day-to-day to build out slowly like this rather than go through the entrepreneurial high stress mode often required to get there.

      Please forgive me if I’m making an assumption that is incorrect – but did you feel that you were VERY actively involved at building your business to 75 properties for a long period of time prior to making it passive?

      • I don’t have that many houses at this time but of those I have talked to in detail it does take a lot of work up front finding the properties to buy or a few properties over many years (effort or time is needed) but if you buy right with the right cashflow from the beginning they have always advocated hiring out as much of the work as possible from day one.

        I think proper planning like saving for maintenance and capex is a big key to being able to hire out work early on, the management side, screening ect. may take longer to feasibly be able to hire help for those tasks. I’m sure there is a point were one would experience growth pains between few enough units it doesn’t take much time to manage and enough you can afford to hire out most tasks.

  10. Syed Hussain

    Hi Scott, I really like this strategy. I’m a beginning investor looking to get my first property and I was thinking about my exit strategy when it comes to my properties and this sounds perfect for me. I currently work as an eye doctor and I love my job and don’t see myself stopping anytime soon, but I also don’t see myself opening my own office. I love the idea of starting small with real estate and scaling up by using the proceeds from your property and personal wealth. I still have a while until I pay off my student loans, but every year I get closer and closer and my income keeps going up, so cash flow will keep increasing for me.

    This is a really exciting strategy and will plan on implementing this myself! I don’t like the idea of managing a whole host of properties or holding on to properties that become old. Thanks for the great advice.

    • Scott Trench

      Haha! Syed, I think my plan is exceptionally boring, so I find it amusing that it is very exciting to you! I think what’s exciting for me (and maybe you as well) is that this appears on paper to be an excellent way to build great real estate wealth without it intruding to a high degree on your career or personal life goals.

      Best of luck!

  11. Jiri Vetyska

    Scott, you got it all right! I am on the same path and would any day prefer to own a great property in great part of town that attracts great tenants than 10 properties in cheap areas, dealing with bad tenants, crime, run down neighborhoods etc. Quality over quantity. Cheap areas offer much better cashflow, but are much more work with little appreciation, while better areas are harder to get into, but offer incredible wealth year after year.

    • Scott Trench

      Yep – thanks Jiri! I’d encourage you to consider, however, trying to look for areas that are “turning” from perhaps not the greatest parts of town, into up and coming excellent locations. Perhaps it’s possible to get solid tenants today, and incredible tenants tomorrow. Perhaps it’s possible to have cash flow AND appreciation if you get to know your market and your investing fundamentals!

  12. PJ Muilenburg

    That was a fantastic write! I can really relate because I also work a full time job that I love and bought a porperty every 10-14 months for the past few years. It’s a good balance, I’ve found. Much of real estate discussion assumes people hate their W-2 jobs but that’s not why many get into real estate. My planned strategy though is to cash-out refi every 10-15 years and only sell properties if they become poor properties (get too old, neighborhoods down downhill, etc). However, I do see merit to your strategy and will certainly give it some thought.
    I’ve never read one of your articles but I’ll keep my eye open for them!

    • Scott Trench

      PJ – I think that you are crushing it! You seem to have a great outlook and I bet that you’ve got a really great portfolio there. As for cash-out refinancing every 10-15 years, that’s GREAT. I think what that gives you is perhaps MORE stable cash flow, with a possible loss in some of the benefits of leverage. I think that comes down to preference – stability vs aggression, and I think that it’s up to the individual to choose that for themselves. I don’t think anyone will be saying that you approached your strategy unintelligently and that you might have a far less stressful business than some other investors out there.

  13. Charles Morgan

    Great article. I think rather than focusing on a number like 7, what I want to focus on is return/time.
    When a property takes more time to handle than it’s worth to me, it will be time to sell it, you touched on that in the part about deciding which one to sell.

    • Scott Trench

      Charles – I absolutely agree. When I was doing the math behind this article and thinking about what I wanted, the numebr 7 kept popping up, to the point where I might have possibly started looking for it a little TOO hard.

      I think that the point of the article is to think about what you really want out of real estate when designing your approach. And then it doesn’t matter that whether you like 3, 5, 7, 9, 11 , or some other combination of properties. Just make sure to keep the principles of buying when you are financially prepared and keeping a favorable leverage/cash flow balance front and center when reviewing your real estate business.

  14. Alexander A.

    I definitely think 100 properties would be too much but the cash flow would be awesome and at the end of the day, that is the only thing that really matters to me.

    I think I will be happy at about 15 SFHs all being managed by a few property managesr. All I really need is enough cash flow to support me and the soon to be wife without us ever having to rely on working for people again. The glamour of 100 properties doesnt do it for me.

    • Scott Trench

      Alexander – thanks for the comment. I think what a lot of the experienced folks have found is that yes, it’s great to get to 15 properties and financial independence, but if you aren’t growing, you are declining. It’s important to systemically and passively manage stable growth over the long-term, IMHO.

  15. Kurt Ehlers

    Hey Scott, I like your strategy and might consider doing something similar but I have a couple questions.

    1. What is your strategy to get up to the 7 properties? I think it would be kind of difficult to buy bigger and better properties for the first 7. I know that once you have the 7 you could use saved cashflow and equity to buy bigger and better, but for the first 7 it would seem hard to upgrade properties while also expanding to more properties.

    2. For your “annual cashflow next 10 years” graph, how does the leveraged property have a higher cashflow then the All-Cash property? The All-Cash property has no mortgage to pay compared to the leveraged property. Am I missing something?

    Thanks for the article!

    • Scott Trench

      Hi Kurt – thanks for the comment here. To get up to the seven properties I plan to do the following:

      1) Save up as much money as I can from my job AND the existing cash flow from my properties. I’m able to save MORE money every year as my properties cash flow and I use that towards to the downpayment on the next one, coupled with my income.
      2) Use the forced equity from existing properties to cash out refi, or qualify for larger portfolio loans.
      3) Network and hustle to find great deals. Other folks find great deals every month, so there’s no reason I can’t continue to get a great deal once per year or so.

      For the graph – leveraged real estate assumes appreciation and rental increases. Rents increase over time, usually on pace with inflation, as do expenses. However, if rents of $1,000 increase 3%, the new rent is $1,030. If expenses of $500 increase 3%, the new expenses are $515. The mortgage will generally stay flat (fixed rate). The result is an increase in real cash flow. Over time, this effect compounds, which is why real estate investors tend to be so wealthy over the long run if they can hang onto their properties.

      Of course, it’s not wise to buy individual properties on the basis of appreciation alone, but historically speaking, ignoring the possibility and indeed likelihood of rents at least increasing with inflation leads to strategic decisions that could produce suboptimal portfolio performance.

  16. Albert D.

    Hey Scott,

    Great article. Love it! It was perfect timing that I came across this article while trying to figure out my strategy. I’m at the point of having one and half rental property, in process of selling the one, and toying ideas of way forward. Total agree that bigger, better and few properties beat quantity in terms of wealth building and way of life. I love my w2 job and plan to do it many years ahead and I love to spend time with family, friends and my hobbies. Your analysis clearly visualized the potential returns on different strategies. The 7/7 approach does makes sense at least at high level and directional. We can always adjust timing, financing, etc. to perfect it. But as a strategy, it is valid and makes perfect sense to me. I actually was unconsciously using it but didn’t realize that or thought it out clearly until I read your blog. Well done!

    Couple of questions / comments:
    1. You provide more details on funding assumptions to build up the portfolio. That’s awesome. Would you mind updating your spreadsheet to show a portfolio view to visualize the net worth and cash flows in 7, 10, 15 years. Guess we can assume refin cash-out and W2 as main sources of down payments. I noticed that you assume all excess cash flows from rentals go into stock investment so we’ll rule out that part as a source for down payment. I think this will also help yourself to clearly visualize and plan ahead your future CF and investment plans.

    2. In my experience, if you bought the property at the right price, you can probably refin and cash out in the following year, instead of 7 years. So could we assume refin and cash out in 3-5 years to be more practical yet still on the conservative side?

    3. The cash flow question Kurt raised above. I think the driver is which underlying value of property to use to estimate cash flow from rentals. The model shows that in the leverage scenario, cash flow is estimated based on total property value (equity plus debt), while in the all cash scenario, the property value is assumed at the pay down equity amount, which is a percentage of the total property value in the leveraged case. That drives the difference in cash flow in the two difference scenarios. In my opinion, the cash flows should be identical (prior to P&I) as these are the same operating cash flows generated from the same rental property. Only difference from leverage is the financing costs which come after the operating cash flow. So you may want to adjust the cash flow in the all cash scenario. But I may mis-read something here and I’d love to hear your thought process.

    • Scott Trench

      Fantastic comment Albert. Thank you for your excellent questions. I appreciate the kind words!

      1) Updating the spreadsheet for the 7, 10, and 15 years will be quite an effort! I will probably do that at some point, and it would make for a great next project I think. That said, I won’t commit to being able to do that in a timely manner here in the next few days. I’m sure that the assumptions will get a little tougher as well there.

      2) I refinanced my first duplex in just over a year after I bought it – exactly as you insinuate, I believe I found a good deal and that helped me to get into position to make that refinance happen. That’s definitely a possible assumption.

      3) I do NOT assume equal properties in the model. I assume proportionate properties. So if you had $100,000, one property might be $100,000 all cash, but the other might be $500,000 with proportionate income at 20% down.

      The $500,000 property might generate more income, but the cash flows are diminished because of the PITI payments.

  17. Albert D.

    Appreciate the quick response, Scott. Yes, the portfolio view can be a big project in itself. Sorry I was not clear on the timeframe. I was thinking one of those, not all three. If we replace portfolio roughly every 7 years, I would say a 15year view probably very helpful. I’ll try to play around with your initial model see if I can come up with anything meaningful then circle back with you see if that makes sense.

    I see your view on #3. Makes sense to me now. Thanks.

  18. Eric Egeland

    Great article and very well written. Sounds like a perfect strategy for someone looking to do this part-time. Also, for those newbies who believe they want a 100 units, your 7 unit strategy could be a great way to test the waters and see if it makes sense for them to scale up.

  19. Andy V.

    This is one of the best strings of information I’ve read for a while. Many of you are having amazing success. Its sure motivating and the varying perspectives are so thought provoking! However, is it just me or are we all getting a little sick of how all you Denver folks are tripping over the ridiculous increases in value/profits out there in Colorado?? Can’t you guys spread that around a bit? 🙂

    -just a little jealous. Keep the great information coming.

  20. Mike mckinzie on

    Scott
    Very good article. I have heard similar seminars to this but the speaker used 10 properties instead of 7. But basically the same concept. Why ten? Because ten years usually gives decent appreciation. Let’s say you bought a house in 2007 at the top of the market. By 2014, it most likely had not recovered even your purchase price. But by 2017, most areas of the US will be recovered. With 10, In year 11, you sell the first year property and either buy bigger or buy two properties. Let’s say you buy 2 each year, in year 20, you have 20 properties. In year 21, you sell 2 properties and buy 4. By year 30, you have 40 properties. Then it gets to,be really fun. Maybe you sell and carry the note. Maybe you start selling SFR and going commercial or units. Managing 20 units is not hard if you have been doing it for 20 years. Plus, your schedule is not set in stone. Maybe some years you buy none and some years you may buy two or three. For example, last year, we bought and sold nothing but so far this year, we have sold two and bought two. In 2014, we sold one (that was free and clear) and bought 8, all with 20% down. And while you are right that free and clear properties do not have the return of fully leveraged property, they are great ammunition to use to purchase fully leveraged properties, through either selling them or refinancing them. So whether it is 7 or 10 or 5 or whatever number is comfortable for the investor, just create the plan, and then work the plan.

  21. Dennis VanHouten

    @Scott Trench
    This article is very insightful as a new investor looking to do the 7 year plan of buy and holding 1 property MFR for the first few years to be rolled over into a small apartment complex and further rolled into a larger apartment complex creating 1 million in net worth after 7 years.
    Adding scale to that plan, by creating multiple 7 year plans working side by side maybe each started a year apart as funds become available to start each plan is something I’ll be looking into.

  22. Tom Killingsworth

    Scott,

    Thank you for writing this article and confirming with numbers a strategy that works for me. I have been thinking along the same lines lately. I am impressed with those who own 100+ properties, but that does not appeal to me. I run another business (day job) and owning 7 or so properties and turning them every 7 years sounds perfect. I also like the lease option strategy on a 7-year term.

  23. Pete T.

    Second time seeing this and I know 7 years is a number recommended, but I don’t get it. The care I put into my properties is costly at first and I am not a fan of giving that away, let alone the transition cost. Maybe at 15 to 20 selling and buying newer, but I can always cash out refi

  24. Tim W.

    That’s a very good Nickerson approach if you’re doing it part time. I can vouch for it working well if you have a full time W2 and only want to do investing pt and not have it take over your life.

    If you haven’t checkEd out William Nickerson a book How I turned a $1k into $1MM, run don’t walk to amazon. It’s a great read, if you skimm over the sections on taxes and trading as that information is dated but the rest is pure REI gold. Of all the gurus of the past few decades he’s one of the fee to retain his fortunes, as his strategy is sound.

  25. Samuel Frye

    Hi Scott,

    Awesome article! I think your ideology of real estate investing very closely aligns with my own. I am just beginning my journey in real estate while (like you) maintaining a full-time job I very much enjoy.

    I have been reading articles such as yours and doing research on the side as I stash away as much money as possible to be prepared for my first deal when the time is right. I particularly enjoyed the very last line:

    “But if you are looking for a passive approach that rewards limited hustle, lots of networking, a commitment to self-education, and financial discipline, this might be great for you as well. I believe that an approach like this scales over time and allows one to consistently reach for slightly larger challenges with each passing year.”

    Again, I believe your methods align very well with my own thoughts thus far on real estate investing. I am sure you are very busy with your investing and full-time job responsibilities, but I would like to network with you if possible. Is there a way to reach out to you on this forum? Twitter (yes, I use Twitter – Millennial and all)? Please let me know the best way to reach you.

    Many thanks,
    Sam

  26. Enjoyed your article and it is similar to my strategy, though I have stuck solely with single family. My long term thought is to diversify and exchange into some type of managed investment property (DST-TIC) like assisted living / medical office. Anyone have any experience with DST investments? One of my concerns is not overpaying. I can see them being a bit like a timeshare, selling 4 mil equity on a 2 mil property.

  27. David Krulac

    Scott,
    I agree having a goal of 100 houses is not something I ever had. and this is coming from somebody who has bought and sold over 900 properties. (See Bigger Pockets Podcast #82). And while having a full time non-real estate job, which required travel, I even bought and sold 74 properties in one year. but none of that was my goal. Even now I just had two settlement this week in which I sold #36 & #37 since the beginning of last year, and am getting closer to 1,000.

    But as I wrote in the Bigger Pockets Book “Real Estate Rewind” (free download on the site) if I had to do it all over again, I would buy less properties. I divided my purchases into:
    1. Properties where I made a lot of money
    2. Properties where I made money but it was not worth the time, effort, risk, or aggravation
    3. Properties where I didn’t make any money
    If I had it to do all over again I’d not do # 2 or # 3. Some of the properties that I bought I bought because they were cheap. I bought a house is a new roof and new electric service for $50, that’s right two $20s and a $10 dollar bill. I bought a piece of land for $1. Neither of these had any debt attached to them and I was able to sell both for a profit. But neither is a deal I would want to repeat. One day I bought 8 properties for $50 each, one of which was five adjoining undeveloped lots. Of the eight I sold 6 was a quick profit, and two including the five adjoining lots I ended up donating to the church next door and the town for inclusion in their park. The two that I gave away were the most gratifying, and if not for those, I wouldn’t want to repeat the 8 property deal either.

    Scott, seven is a fine goal. Obviously I can’t go back there. I think that what ever a personas goal is, its their goal and its fine with me, whether its 1 house or 100 houses and any number in between. One goal that would seem to work is something like 10-20 house, A or b grade, paid off and generating $100,000 or more positive cash flow after expenses. I’d like that goal.

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