How to leverage my only rental into aquiring other properties? Help me be like you!

[Eric Blair]

Here’s my situation.

Montgomery Alabama
Purchased my first property for $107k with the intention to rent it out eventually. Used my VA loan and zero % down to make it happen. This was also the first house I've ever bought. I just finished paying off a bankruptcy from divorce and was feeling pretty good to get a loan for 4.25% in 2019. Lived in it for 2 years and did minor things to spruce it up. Carpet, flooring, paint, fixtures, landscaping. I mean the house was basically in great condition. Even had a brand new roof and young HVAC. Then Covid hit and rates dropped. Couldn't resist that juicy refinance to a 2.75% rate. Made the property ripe for profit. So I refinanced under the VA streamline refinance loan (IRRRL). Refinance was $110k, no down payments and rolled in closing cost into new loan. Won't go into specifics but the refinance allows VA loan users to purchase a 2nd property.

In 2021 rates were still low so I bought a 2nd property to eventually rent out. Property $178k at 2.5% bought using my VA loan with zero% down. I actually offered $174k and rolled my closing cost into the loan. Can you believe that? I offered below asking price in 2021 and my offer was accepted! However, due to crazy high rates and housing inflation, I still live in this house. Rates went up before I was in a place finacially to aquire another property. I also career changed and took a pay cut. I now make double what I use to so I can afford to put money into investing monthly. It’ll make a killer rental one day

First house currently rents for $1275. Mortgage, including insurance, escrow etc. is $589. Currently I do not use any of the leftover money as I have been saving it to create a buffer for CAPEX and maintenance. So far have roughly $10k saved up in the last 2.5 years sitting in a HYSA. Balance on the house is now $101k with comps in the neighborhood between $140-$155k. Everything has gone up in the last few years around this home.

2nd house is $900 (property taxes increase yearly) now. Current rental comps are $1500-$1600 in my neighborhood. Remaining balance is $168k. Selling comps in the neighborhood are $215-$235k

There are very few properties that are cheap these days. Even the rehab ones. I don’t have money saved up except an emergency savings fund. Currently I can save $1500 monthly after bills. Multi door properties are basically non existent near me. So given my situation, what are some clever ideas on how to leverage my current situation into buying another property?

Thanks everyone

[Nathan Gesner]

Quote from @Eric Blair:

I disagree with the HELOC advice. That's a method of borrowing money to borrow money, which is how people over-leverage and get themselves into trouble.

You were fortunate enough to jump into the market when everything worked in your favor. The market has turned and is difficult for everyone right now. My suggestion is to use your good fortune to stay ahead of the game. I suspect you are making $1,000 or more in cash flow each month. Set that aside. Cut your expenses. Increase your earnings. Set aside as much as you can. When you save up enough for a strong down payment, buy another property. With high prices and interest rates, you may have to save 40% or more to make an investment work, but it can work.

Don't forget to save up a reserve first!

RESERVES

This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.

I like to start with one significant expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a typical scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

But there's more!

What if you're a cardiologist with no debt and making $250,000 annually? You could probably afford $20,000 without much impact on your budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.

What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cash flow from my current rentals. I also have a $175,000 line of credit ready if something catastrophic happens. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

The point is, that you should sit down and assess your finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.