Just getting started and wanting to discuss strategies.

Goals, Business Plans & Entities
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Just getting started and wanting to discuss strategies.

Zachary Dosch
Bismarck, ND · Member since 2011 · 142 posts · 16 votes

Hi everybody - Long time reader and new poster.

Im 25 years old and just getting started in REI. The more research I do the more Im convinced this is how I want to invest my money. My family has also had success in REI so I figured why reinvent the wheel?!

My goal with REI is to get to a point where it is a full time job and the income it generates is something that can not only take care of myself and my family presently, but also for future generations. My primary strategy will be buy and hold and build up the excess cash flow for a down payment on the next property. I want to keep this going until I get into at least 7-8 properties which when paid off would net at least 10k/month. However, when Im 35, I want to transition from using the downpayments to get into extra properties to paying off the properties and potentially consolidating the equity into 2-3 12 unit apartment complexes, putting them on a 15 year note and having them free and clear when Im 50.

Currently I have two single family residences and I was able to purchas both of them OO (moved out of one and into the other). The first I purchased for 165k and it has $325.mo net positive cash flow. The house is now currently valued at 185K. The second house and the one that I am currently living in I purchased for 160k with $200/mo net positive cash flow from my roomates and the value of the place is currently at least 180K.

Im from North Dakota and the housing situation is very unique. Due to the oil boom and other factors, houses, especially in Bismarck where I live are appreciating at a nice rate. Historically, home values have always stayed at about a 3%-6% steady rate per year. The foreclosure rate is next to zero and the houses that do go into foreclosure basically sell for market value. In addition to that, the rental market has heated up. Its a very unique situation but it has turned out to be very profitable. There is no flipping of homes (the guy tried to flip the one I currently live in.. made for a nice amount of built in equity). To me, this market is calling for buying and holding.

For my next investment, I am eyeing a side by side duplex that I would move into. You can get into a good one for $225k out here with decent cash flow. Either that or another SFH as I have really grown fond of how easy they are to rent and maintain in addition to the quality of renter they typically attract.

My question to you guys is 1.) what are your thoughts on my strategy 2.) what are your concerns and 3.) If you would do anything differently.

Also, Im guessing you will have more questions about the current situation as it is fairly unique and I will answer everything to the best of my ability. Thanks in advance, fellas! You guys are life savers!

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  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    15y

    Zach,

    One really great thing I like about your strategy is that you have specific goals vs something vague like "I want to make a lot of money."

    If you don't mind providing more details on how you are calculating cash flow on your two properties. Is the $325/month cash flow after all the expenses or is it just Rent - PITI? My main concern here is that you may not be including all the expenses that come with holding a rental property.

    You mention that you want to have $10k/month cash flow from 7-8 properties. What size properties are you talking about here? Because if it's SFH and/or duplexes, it will be difficult to get to net of $10k/month from them. But if you are talking about big apartment complexes, then that's a different story.

    Can you provide numbers on the duplex? How much is the rent for each side? What are the terms of the deal? How much down payment, etc.? Are you using your own cash for the investments or are you using a private money lender or HML?

    One thing I would highly recommend is joining a local REIA in your area. I tried to look up some online, but I couldn't find any in ND. If that's the case, find out some real estate investors in your area, take them out to lunch and discuss what they have been doing and what's been working for them.

    You can also call them local property management companies and get their feedback on the rental market and the areas they would recommend for investing.

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  • Sherry Lewis
    Rehabber · Fort Walton Beach, FL · Member since 2011 · 240 posts · 48 votes
    15y

    Zach,

    It sounds like you have a well laid out plan for your future. I think Sharad has very good questions as well. I wish I had that much organization and dedication at 25 to my future! I wish you all the best in accomplishing your goals!

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    15y

    To get to a point where your investments are paid off and your making $10k per month is going to take a very long time with your current strategy. It sounds like you might run out of money buying houses like you are at some point. You can only move into the homes so many times and you will need to put down 20%-25% every time.

    You might need to consider investing outside your area to achieve this goal depending on how fast you want to do it. Good luck and keep going.

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  • Zachary Dosch
    OP
    Bismarck, ND · Member since 2011 · 142 posts · 16 votes
    15y

    All -

    With the leases I have in place, the tenants are responsible for all up keep and utilities for the first SFH. The place costs me $1020/mo to run including PITI and the rent is at $1370/mo. I realize it isn't the best deal but since I only put 11k down and the house is appreciating, all in all I think its a deal and Im very comfortable with it. I literally received 20 calls from the time I posted the add on line (8pm) to lunch the next day. Needless to say the demand is there and I wish I had more SFH!

    The second house that I am currently living in, my costs per month are $920/ mo. and my roomates pay $1120 a month plus a fourth of the utilities so basically my living expenses are a fourth of the utilities and some general upkeep around the house. Once I move out the rent will be at least $1400. I think I am light on the first property's rent because the house is slightly bigger and it has 2bed/1bath more than the second house.

    The duplexes that I am considering are in the $225k range which would put be at a PITI of roughly $1300/ mo. with rents being $900-$1100/ per side. I could also get into a 4 plex but I have really found that I like SFHs or possibly duplexes because of the type of renters they attract vs. the type of renters a less expensive place attracts.

    Between these three properties, they are going to generate roughly $1200/mo in positive cash flow that I would build up for the downpayment on the next property and snowball it until Im 35 at which point I would swich to principal reduction so I can have them paid off by the time Im 50.

    I am getting the 10k/ mo from receiving roughly $1500/unit x 7 units = $10500 conservatively.

    The nice thing about my situation is that I am able to do the majority of repairs by myself and with my dad so the cost of upkeep is basically the price of materials.

    Im also planning on adding some of my own cash to the down payments as I have found that I don't have much of an apetite for the stock market outside of my retirement accounts. I actually have a good job and so does my soon to be fiance and we live well below our means. We also have no other debt except the mortgages and we both have graduate degrees (thanks to basketball scholarships) so this is something we can really be adding money to. I have cash reserves, lines of credit and an $1M umbrella policy to protect me from liability for the time being until I have more equity built up. At that time I will most likely form an LLC. My Dad has also and is willing to continue to be a cosigner on these deals and Im starting to get spread a little thin because I haven't shown the rental income for two years so the bank can't usually use it.

    Basically my goal is to get into as many rentals as I can comfortably until Im 35 then switch to paying them off so I can retire!

    I do have a very good mentor and he just so happens to be the guy I go to get my taxes done so I am always bouncing ideas off of him and he knows deals inside and out. He has about 40 properties around town so needless to say he is rolling. The only issue is that he got his start when lending guidelines were much more loose in that he didn't have to put downpayments - he let the bank take a lein on a CD and once the loan was paid down far enough, the bank released the lein and he bought another property and so on and so forth.

    The thing about my area is that it market heats up even more when I go to the west due to this Bakken oil field. It is unbelieveable how much oil they are pumping out. There are way too many people and not enough housing. Couple that with the floods this summer and we have a tremendous rental market. There really aren't any great deals on houses as the foreclosures go for market value but at the same time they don't hurt the market and properties still cash flow nicely so it is working out for now.

    Another issue I am considering is I screwed up and put a bigger downpayment on the second property. Basically I succumed to peer pressure from my mom haha. I only owe just over $125k and the place is conservatively worth $185K. Should I take a HELOC on the place for a downpayment on another place? The cash flow would be a little tight but I think it could possibly work in the name of leveraging other people's money!

    Thanks again for all your help guys - this site is really awesome and you guys are all very generous with your time and wisdom. I will no doubt pay it forward when I have the chance!

    Thoughts comments concers suggestions?

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  • Zachary Dosch
    OP
    Bismarck, ND · Member since 2011 · 142 posts · 16 votes
    15y

    Another question, and this is going to sound stupid but the income generated from these properties should be covered by depreciation, interest expense and other write offs and then some, correct?

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  • Brad P.
    Real Estate Investor · West Des Moines, IA · Member since 2009 · 55 posts · 21 votes
    15y

    On both properties, what happens when you have to replace the roof or water heater or any major expense. What about vacancies? As you will find over and over on BP, it is VERY dangerous to assume PITI-Rent=cash flow...you're positive cashflow is really negative when you add in these major expenses and vacancies. Search for the 50% Rule and check out the landlord forum.

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  • Zachary Dosch
    OP
    Bismarck, ND · Member since 2011 · 142 posts · 16 votes
    15y

    I have cash reserves to cover emergencies and repairs that I have set aside to address those issues. When I was stating what the property costs me every month, I was including extra to account for repairs.

    Also, Its not likely to be vacant any time soon as illustrated by the volume of calls I recieved wanting to rent the place with out even seeing it within a half of a day.

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  • Brad P.
    Real Estate Investor · West Des Moines, IA · Member since 2009 · 55 posts · 21 votes
    15y

    I guess my point is that you won't ever really "build up excess cash flow" as you said in your original post, unless you have serveral hundred dollars built into what you stated as your PITI payments.

    Your plan sounds like a good one provided these properties you have really will cash flow. Just don't fall into the trap thinking you are making $200-$300 per month from each property and then in year 5, you need a new furnace or a new roof. Because there goes all of the "cash flow" you've saved for several years.

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  • Zachary Dosch
    OP
    Bismarck, ND · Member since 2011 · 142 posts · 16 votes
    15y

    Thanks for the advice - You are right, a situation may/most likely arise that will eat into the cash reserves but I plan to offset that with my own cash injections from time to time to keep the accounts building up for the next downpayment to keep the plan on track.

    Are there any other thoughts, comments, questions or concerns?

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  • Stu Holbrook
    Real Estate Investor · Portland, OR · Member since 2011 · 34 posts · 5 votes
    15y

    Time is money as well. Maintaining 2 houses now is fine but over time you will face larger construction issues and not just from major incidents but from normal use. If you have more properties will you still do the work yourself? Would you want that life? I truly think you should consider a plan to use a land management co. or likely better in your case -farm out the maintenance to a third party. That way you can still check on the properties but not be a slave to them, you are only young once. Ambition and a work ethic are virtuous but protect your time, spend some chucks of time and money now while you are in your 20's and without children or other major responsibilities. In the long run it is healthy to have quality time with your loved ones- for mind, spirit and the relationship.

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  • Zachary Dosch
    OP
    Bismarck, ND · Member since 2011 · 142 posts · 16 votes
    15y

    I will absolutely keep that in mind. Nothing is more important to me than my time with my friends and family which is why I am doing this in the first place. Depending on my future financial situation, I see this as a very real possibility!

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