Too big, Too fast?

Question

Good morning all,
So I am on this site every single day, and I love it.  I haven’t been posting anything because I have been trying to contain my excitement about this whole process.  We (my wife and I) had decided to wait until after the first of the year to purchase our first piece or rental property.  I am going to be cashing in a couple of stocks that have done well, and for tax purposes, we decided to hold off until the first of the year before cashing them in.  They aren’t my retirement; these stocks were just a fun hobby instead of heading down to the riverboat casino all the time.  Anyway, it is about time to start looking!

My question is how fast is too fast to buy additional real estate?  How quickly did you purchase your second property?  Our goal is to buy 2, possibly 3 properties this year.  Does that seem crazy, or is that doable for a new investor?  We will be managing the properties ourselves for now.  I realize I am putting the horse before the cart asking about buying a second property when we haven’t bought the first yet…I am just wanting to see how people with success have done this.  I understand that finding the right deal(s) is a key, and not over-extending ourselves.  I am just curious on some suggestions for how fast to start from the beginning.  I have read approximately a dozen books and hundreds of BP forum posts.  I would just like to hear some personal stories here regarding how quickly you moved after your first purchase.  We do not plan on taking any profits from the rentals, we are just going to keep re-investing every bit we can towards the next purchase(s).

The 20% down isn’t really the issue for our second purchase, I am just wondering about the experience required with being a landlord.  We have looked at a few properties, and are getting ready to look at a few more in the coming weeks.

I am not sure if I am asking for someone to slow me down, or someone to tell me that full speed ahead is ok.  Just looking for some personal success (or failure) stories with starting out.  I really appreciate it!

DJ Cummins

Cal C. · Answer

The pace at which you buy properties is far less as important as to the quality of the deal. Patience is a virtue in RE as long as you are not falling victim to analysis paralysis. If you buy 2-3 great deals every year for 10 years, you are far ahead of most RE investors.

Bottomline- Don't worry about pace as much as the quality of the deal!

Nathan Emmert · Answer

I'd wait 3 to 6 months after your first splash.

Why?  Simply to learn some lessons from that first purchase (whether it be 1 property or a couple) to incorporate into future buys.  Sometimes it takes a while for things to popup so immediate success doesn't always translate to long term positive results.

Beyond that, never grow too fast that you crunch your cash reserves.  There's a new "deal of the century" every single day.  If you're leveraged too far without cash reserves chasing one too many deals can cause the entire thing to collapse completely destroying the wealth you're trying to create long term.  This isn't a sprint.

Troy Fisher · Answer

1 - If you limit yourself to a plan you may not be open to some of the best opportunities that arise.  I think being a little scatter-brained is a good idea as long as you can reign yourself in when you need too, or have a partner that gives you a swift kick in knickers when you've gone a little to far.

2 - I'd say find the deals that fit your goals.  Quality is such a misnomer.  Quality SFH doesnt hit the cap rates or coc returns that something a little further down the road is going to hit.

3 - Cash reserves are vitally important!  Keep enough to deal with problems.

4 - Network all the time and meet the right people.  Being in Banking you should have a better idea of where people are more willing to lend and what things to be looking for when presenting lending packages.

And here's my story, I bought 3 fourplexes in Las Vegas in 2011.  Within a 6 month stretch.  2 closed in the same week!  Now these were all short-sales so we'd been sitting on the offers for awhile (1 for 12 months!) and we definitely didn't think that they would close that close together seeing as how we'd been sitting on them for awhile.  We spent all of our money leaving little to no cash reserves (We'll that we wanted to take from elsewhere and invest in to real estate).  But the market was right to buy.  And while it took us a while to get them leased up and running because we were shoe-stringing it we stumbled almost every day.

I finally have them under contract to sell, and am looking at moving to a new market.  Since neither I nor my partner have W2 income any more, we had to go shopping around for the right financing. We think we found it, it's going to cost me a couple of percents on interest, and I have to spend more than I wanted to (I wanted a Non-recourse commercial loan at 80% LTC) and they told me I had to buy more!  Ohh, bankers thanks for twisting my arm and making me buy more real estate.

So I am looking at closing on a 5 building portfolio deal.

I guess in rambling on I made a lot of mistakes buying so many units (12 doors) right out of the gates.  But I muscled through the problems, and am kind of wishing I'd not stopped buying while I sorted through them because I was buying right!

David Begley · Answer

NA Cummins  Following up on my above comments, I had no sooner hit "Post Reply" when the following BP Blog popped into my orbit!  Saying much of what I so ineloquently tried to say above:  http://www.biggerpockets.com/renewsblog/2015/01/11...

David Begley · Answer

NA Cummins 's assessment, and I'll bore you with my lessons learned since you asked and since this is similar to the very "problem" I was noodling on when I read your post.  My situation is a little different.  I decided to bow out of the rat race after a 25+ years as a banker (the last several years at a comfortable mid-six figure salary), and with my wife's tentative blessing, began REI full time.  We decided an amount of our savings/retirement that could be used in my new business and after a period of research, studying, obtaining a real estate license, and a period of analysis paralysis, I jumped in with both feet.  Lessons learned the hard way:  1. Draft a business plan and stick to it.  I was (and still am) all over the board in how/where I want to invest.  2.  Regardless of how long it takes, find the quality deals and don't jump at the first or just any opportunity.  Be very selective.  3.  Do not commit all your cash, regardless of how lucrative the deal may look, because   4. It is extremely difficult, if not impossible, to find bank or reasonable credit without a W-2 (my situation, maybe not yours) and financing real estate investments, even with a W-2 can be challenging.

For me, #3 & #4 is where I learned most lessons.  If you are doing this full time and/or will need to finance your investments, set up the credit facilities before investing anything - even if you think you won't need it; and keep back enough reserves to get you through those rainy days.  Adapting to cash flow fluctuations and the timing that requires takes more diligence and forethought than I was originally aware.

Good luck!

Jesse T. · Answer

If you stock windfall is enough to pay cash for a solid property in good shape and carry it, until rental I would start there.  20% discount to retail value is a common metric.  That should give you a lot margin for error if you can find that.

After an appropriate seasoning period you should be able to do a cash-out refinance for most of the initial cash.  If you got in at 80% of retail value and you had some sweat equity and/or appreciation, you may even be able to pull out all of your initial purchase price.

If you have to go in leveraged, that is fine, just be careful and make sure you have reserves.  50% leverage with reserves on a very good deal is probably better than 75% on a potentially great deal that might be too big to start with.

How would you current residence look from a rental point of view?  If it looks favorable, then getting a new primary residence might be the quickest path to building a rental portfolio.

Yvon N. · Answer

very good question

I've been tackling a the question of how fast and how much. to the point where i crossed out 2 units MF as not being enough unless each units has 3 bedrooms,  and looking at small apartment building. granted my searches are based on affordability so I'm home learning do the analysis will bring me back to where i need to be as far as what my plan dictates.

Mark Liscia · Answer

Yes, I would like to repeat what the other posters have said.  Finding quality deals is the first order of business. Next is making sure you feel comfortable adding deal number two to your portfolio.  Does it fit in with your risk profile, can you handle the additional work associated with it?  With that said if you find a good deal and are comfortable with it, your second deal could come as quickly as next month or next year.

DJ Cummins · Answer

@David Begley I read that blog yesterday.  That sparked my question.  Thanks to all for the info and opinions.  Great advice about not setting a number of properties but to just find great deals when we can afford them.  I just wanted to make sure I didn't sound to crazy being new to this!

Ryan R. · Answer

To echo Cal. C, don't worry about reaching a number of properties by a ceratin date. Set your goals based on metrics that indicate the value of a deal; how much equity it will hold, how much it will cash flow, how long you can hold it and anticipated appreciation.

When a prospective property meets the metrics, go for it. But don't buy a deal just because it's time to buy another house.

Too big, Too fast?

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