How are you making money if always in debt?

[David Ogas]

Hello Everyone:

At this point, I am a prospective investor who is looking to get into multifamily real estate. In short, I'm in the research phase of my development and in doing so, I've encountered several strategies for acquiring real estate and developing a portfolio.

Whether it be 20% down and then later, utilizing another 20% down to buy more properties, or by utilizing the BRRR method, the thing that I can't seem to understand is how anyone is profiting if they're constantly owing money to the bank, without paying off the mortgage in full from the first property?

On the surface, it appears that you're only making partial payments on one property, and then moving on to the next property by adding another mortgage that you're still responsible to pay for with interest. It would seem that if you're always in the red, that at some point, you could get yourself into a lot trouble with the bank or potentially ruin your credit.  

In short, what's the point that I'm missing?

[Randall Alan]

Quote from @David Ogas:

Hello Everyone:

At this point, I am a prospective investor who is looking to get into multifamily real estate. In short, I'm in the research phase of my development and in doing so, I've encountered several strategies for acquiring real estate and developing a portfolio.

Whether it be 20% down and then later, utilizing another 20% down to buy more properties, or by utilizing the BRRR method, the thing that I can't seem to understand is how anyone is profiting if they're constantly owing money to the bank, without paying off the mortgage in full from the first property?

On the surface, it appears that you're only making partial payments on one property, and then moving on to the next property by adding another mortgage that you're still responsible to pay for with interest. It would seem that if you're always in the red, that at some point, you could get yourself into a lot trouble with the bank or potentially ruin your credit.  

In short, what's the point that I'm missing?

@David Ogas

Sounds like you can’t see the forest for all the trees! 

I’ll try and keep this short… in the past 5 years my wife and I have been able to buy 46 unit (starting at age 47) mostly single family, but a mix of duplexes, and triplexes as well.  All but 2 were bought using leverage.  At our high point we had 19 loans and had about $1.1 million of our own money into those properties.  We worked corporate jobs until we had 20 units and then both switched to real estate full time.  

5 of those properties ended up being flips… we netted just under $100,000 each before capital gains on most of those.  We have sold 4 other properties and through market appreciation we were able to pay off many of our first properties.  We also cash out refinanced  other properties that had significant appreciation and paid off additional properties.  

5 years later our remaining portfolio is worth over $6 million and we have gone from 19 loans to 7.  Minus out the remaining loans we would be at over $4 million in equity.  While you never realize it at the moment, our timing was pretty perfect with the market run-up. Our per door  cash flow is now over $600 per month after all those pay downs. 

Anyone would be hard pressed to duplicate that in today’s market.  But real estate is cyclical, and it will come back around.  

What really motivated us was the futileness of the 4% withdrawal rule (you can only w/d 4% of your investments per year to be sure you won’t run out of money in retirement).  The thought of living on $40,000 /year coming from a dual income a lot  higher wasn’t going to work for us.  

It starts out as a leap of faith.  But real estate is SO SO powerful as a generator of wealth.  The best thing is that you are pretty much in complete control of your destiny.  You aren’t subject to the random swings of stock market like a passenger on a bus!  Sure, you exist in the real estate market with its own ups and downs, but you choose when to buy and sell and the in between if you bought well is a pretty smooth ride! 

It’s  not without its excitement though on occasion… but I don’t regret one moment of the trip so far.  When the markets settle back down I would encourage you to hop on and enjoy the ride!

all the best!

Randy