Is this a good expansion plan?

Question

For 2014 I have already acquired one property a duplex that I live in. I told myself that I would get one more before the end of the year. I have been making offers that last few weeks on SFHs in my neighborhood. So the plan is to have 2 in 2014, 4 in 2015, and 4 in 2016. After those three years I will slow down and focus on debt pay down using the debt snowball method. I will be managing these properties myself because they are close to my personal residence.

Is this too ambitious to acquire 10 houses in 3 years? I am buying SFHs in the $50k-100k range. For safety I am keeping 5k in reserve cash per house that I acquire. I make decent money at my job and plan on staying with them for another 5 years while I carry out this plan and pay down some mortgages. I am thinking through all the what if scenarios if and when Murphy's law kicks in.

Come one come all shoot holes in my plan. :)

Will F. · Answer

It might be harder to purchase 10 houses in the next few years as the competition and prices of housing have gone up a TON since 2011-2013.  I think your expansion goals seem good in an upmarket.  Take it slow and steady as you won't be seeing as many deals as we've had in the past couple years, which a lot of the advice on here will be based on.

Dru Steeby · Answer

@Joseph Weisenbloom

I recently got an Owner Occupied Duplex with FHA because of the 3.5% down. The bank told me that if I were to go with a conventional loan they required minimum 15% down. Good to know that other banks may give 5% down!

Joseph Weisenbloom · Answer

Yea if you live on the property you can get a loan with a lower down payment. If you get conventional financing the minimum is 5% down for SFHs and duplexes. You can also get an FHA loan with 3.5% down for multis up to 4 units. On the downside FHA loans include more red tape and high PMI.

Rates may vary depending on credit. I am not a mortgage broker so definitely talk to a professional.

Dru Steeby · Answer

@Joseph Weisenbloom What do you mean by Owner Occupied Loan? Did they give you a conventional loan at 5% because you were occupying? Or is it an FHA loan?

Joseph Weisenbloom · Answer

@Rajib Miah I plan on using 20% to 25% for the first 4 properties then I assume it will become more difficult to get conventional financing. No plan to finance properties after that but I'm thinking a portfolio lender. Either that or start buying cheap houses for cash and fixing them up.

I am currently living in a duplex that I put 5% down on. Once I have lived here for a year I will use the owner occupied loan for another duplex.

At then end of the day I am a good saver so I know I can get at least 40k per year of savings from my day job. At this point I am just taking it one house at a time. This plan is not set in stone. Depending how things go I may just buy a fourplex instead of 4 single family houses. Whatever opportunity comes my way.

Rajib Miah · Answer

Hi @Joseph Weisenbloom  what percentage down payment are you planning on making for these properties? I have a similar plan, but only planning on buying one or two properties a year, because I've heard you need to put down 20% to 25% on investment properties.

Adam Johnson · Answer

I like your conservative plan. Stay with it and once you are comfortable you might consider being more aggressive. It is very tough to get out of a corner once you find yorself in one financially.

Dmitri L. · Answer

Very well put! People tend to forget that 2nd one, but it's a huge built-in safety margin

For calculating reserves - vacancy and regular maintenance expenses are pretty easy based on the standard formulas.

For capx items, a good formula I have seen is - for each item that could fail (water heater, furnace, roof, etc), take the cost to replace, and divide it by the approximate useful life (in months). This will give you  monthly capx reserve amount to put aside. If any items are close to the end of their useful life, divide by the estimated remaining life instead

Best of luck!

-D

Joseph Weisenbloom · Answer

@Mark Creason Mark I invest in suburbs of DFW and agree that there are some good opportunities out there. Particularly outside of the city.

@Adam Johnson I agree that has been a concern of mine. I am hoping that keeping 5k in reserves per property will allow me enough wiggle room if anything crazy happens. I don't need to live off my cashflow yet so I plan on saving that cashflow for future investment. Im hoping that the combination of reinvesting my cashflow, living below my means and keeping high reserves will keep me safe.

Adam Johnson · Answer

It depends on your financial situation, but the downside of fast growth is that you may become illiquid at some point, meaning that on paper you have money, but you don't have the cash or cash flow to pay your bills.  I have grown several businesses this way, one of which ended in a ball of flames and a decade of heartache.  Your plan sounds reasonable, but don't get caught up in "that guy grew really fast, so can I".  You need to monitor your plan on a regular basis and adjust on the fly.  Try to look not only at now, but next week, next month and next year so you can see trouble or trends developing.  Running out of cash sneaks up on you very quickly and is very difficult to turn around if you become property rich and cash poor.

I am not saying if your plan is good or bad, that will depend on your situation.

Is this a good expansion plan?

Most Popular Reply