How can an average guy get multiple rentals?

[Joe Boggin]

Let's take an average working class guy. He makes 60k a year and has a mortgage and a car note.  10k in liquid savings and some bedroom cash for dinners with the wife. 

If he decides to get into real estate, he will need to borrow. Banks will evaluate his earnings and debt and his ratios. Best case scenario a bank will loan him 50k for a small single family rental that earns 200/door. Now he is in the rental game. But how do you move on?  How does an average guy get multiple units? Who will lend to a guy with middle class salary and two mortgages car note etc?  for an average guy, two mortgages will throw his ratios through the roof!! How can you obtain more units?  It takes some time to use that rental income on a loan?  Taking out a line of equity will increase your ratios even further?  What am I missing?  

Is it me or is the guy with 50-70 rentals, have a 200k a year salary and lives in a tent so he can extend his borrowing power to buy units?  Refis or equity lines that are taken out of one property to buy the next all increase ratios and eventually will cap your purchasing?  

[John Matthews]

@Joe Boggin

I think it comes down to this. In the scenario you're talking about (making 60k / year and buying an average property when you can afford it). I felt the same way, which is why I didn't get into real estate two years ago. Looking at the numbers, a 12% return on my money isn't that great when you consider it's still a job, and you can truly, passively earn ~8% in the stock market by putting your money in an index fund or two. The extra 4% doesn't make the job aspect worth while. for me anyway.

Here's the difference, that never really clicked until recently. That's all presuming you're buying average properties. Or put another way, it assumes you're buying properties at market value, that cashflow. The way to get out of this though is find value where other people have overlooked it. That's what warren buffet did to get where he is today.

So what do I mean by that? Buying an asset under value. So buying rental properties at some percentage under market value. Let's look at some numbers:

Property is worth $100,000, it rents for $1500/mo. If you buy it at $100,000 with a 25% downpayment, let's assume it follows the 50% rule and your debt service is around $500/mo (which it's probably not, but whatever...). You're cashflowing $250/mo or earning 12% on your money. Better than the stock market, but not getting you anywhere fast.

What if you bought it at 70% off market, for $70,000? Well now you 25% downpayment is less, but your rent is the same. So now you're making 17% on your money. Still not that great. The magic in this scenario though, is the equity you've got. What you can do now, is wait 12 months, go to a bank and do a cashout refinance based on the market value of the property. So now you can refinance it to 75% or $75,000. Which means you can pull all of your money out of the property + $5k. Your return just went from 17% that first year to over 117%.

See the magic there? Now you've got other options open to you, like partnering with people who put their money in instead of you because they're protected by the instant 30% equity you bought the property at. Or you can use private money to fund the deal (for the same reason). Or you can sell the property instead, and double your money 6 months instead...

The key is in finding value where most people don't. It's how people get rich with longterm stock plays, or in buying businesses (a la warren buffet) or in buying real estate.

Hopefully that helps!