40 units in 6-8 years using conventional loans, possible or not?

Question

I have very simple but extremely "it all depends" kind of questions, but if I provide these following details perhaps the answers can be black and white and not so grey.

Ok so I'm a starting investor and my essential goal is to own ten 4-unit buildings (40 units total), and cash flow $10,000 a month, clean income after all expenses. Each 4-unit building will be purchased for $200k max in working class neighborhoods. Conservatively, I am hoping each building will generate at least $1,000 a month. It will most likely be more than that (maybe $1,300) but I know in reality there are always more expenses than expected.

I own a flooring business and given that it continues to do as well as it has been, my plan is to buy one building per year for the first 3-4 years then buy two a year with the help of income from those new 3-4 properties, until we own 10 buildings. I want to use standard conventional loans and put down 20-25% deposit for each building. That would be about $40-50k deposit per building. Knowing and hearing all the horror stories I realize there are alway way more expenses than you ever expect, so therefore we plan to collect $80k for every property, so we would haven about $30-40k left over for safety margin in which we can use for initial remodeling if needed, and any unexpected expenses that may come up. We do not want to buy any properties in section 8, but rather in blue collar working class areas.

Here is my question: given that we can pull off collecting $80k per year for one building a year for first 3-4 years, and 2 buildings a year after the first 4 properties, is it realistic to get to where we want to be in 6-8 years which is 10 buildings and $10k cash flow a month? I know the math works but is any of this realistic? Will banks allow me 10 investment loans in next 8 years? (I do have a really good credit score and history, at least 750) Will each 4-unit building generate $1,000 at least of cash flow given that we give it proper management/maintenance? Without any sugar coating, can somebody who owns a handfull of multi family units (preferably at least 20 units) tell me the reality of my plan and if I am being WAY too naive with my plan? Are my expectations way too high? If they are too high, what should I be expecting then with the amount of cash we are planing to invest?

All answers are appreciated and thank you so much for you time!!!

Max

Kelly N. · Answer

Hello Max,We started buying multi units 2.5 years ago, and bought two triplexes. We just purchased our third rental house, a quad, bringing us up to 10 units. These houses and our personal residence are all financed in my husband's name- I am a stay at home mom but I manage the properties. Once you get to 4 financed properties, the banks want 30% down instead of 25%, but now I am able to qualify for the loans based on the income on the other rentals and the property I intend to purchase. We're in negotiations on 2 more properties now, which will bring us up to 16 units and 5 rental properties. We'll buy another one or two next year in my name, then we'll have to start putting 30% down for loans 5-10 for each of us. So, yes, I believe it i possible if you are able to find decent cash flowing properties and keep some back for reserves (which the banks want to see anyways). Kelly

Mike H. · Answer

In terms of commercial loans for SFH, it varies from bank to bank.Typically, you'll see 70% LTV - so for purchases, that would be 30% down. But some banks go do 75% or 25% down. Just depends. In terms of limiting the number of loans, though, they don't have any. Now some banks might have a total lending cap for any one individual. So they may tap out after a million, 2 million, etc. Just depends.But your best is to do the conventional loans for up to the 9 properties (10th being your primary). And then start looking at commercial. Conventional loans are great because they're 30 yr fixed amortized over 30 - which ash flow great. Commercial loans are 5 year balloons, a little bit higher rate and amortize over 20 or 25 years. That means less cash flow and that you're at risk of a rate hike when you go to renew the loan in 5 years.

Mike H. · Answer

Technically speaking, you can definitely get 9 conventional loans for those types of buildings. They're considered 1-4 unit properties and fannie mae has a 5-10 loan program. There are more restrictions on the 5-10 loan program but its doable.I say you can only get 9 properties because I'm assuming you own your own primary residence. That would count as one.But I don't think financing will be an issue. You don't have to buy these properties using conventional financing. You can get commercial loans from local banks to buy 20 of these buildings (80 units) if you wanted to.And given the fact that you're going to be able to put down 30%, that will make it all the more easier.What I can't tell you is whether your income will be 10k a month once you get to 10 buildings. That depends on a couple of things:1) How much rehab the buildings need and how much of it you do up front2) Age of the buildings - newer the building, typically, the lower the repairs.3) What areas they're in (i.e. vacancy/turnover)4) Size of the units (2bdrms are better than 1bdrm units)5) What kind of deal you get on them. If you buy a 200k building and its worth 300k, then you'll likely be making more money than if you buy a 200k building thats only worth 200k. What you'll want to do is find a target area(s) that you can buy these properties in and that, once you do, will hit your income target ($250/mo net income per door). Given the fact that you're going to be putting 30% down and paying rehab out of pocket, I have to believe thats going to be somewhat doable.But it really does depend on the area. Here in Illinois, the 4 plexes don't really cash flow as much as you'd like.

Kenneth LaVoie · Answer

Max, typically 1-4 units you can get 20 year / 25% down /4.5-5.5% interest that reset every 3-5 years within limits (2% pts per reset / 6% pts lifetime for example)Once you get over 4 units, they call them "commercial" loans vs residentlal (terminology varies, so sometimes this is confusing) Typically, 20 year / 20-25% down / 5-6% reset every 5 years and have pre pay penalties like 5% first year, 4,3,2,1. With commercial they judge more on the profitability of the building vs. you. This can often mean EASIER qualifying vs. harderI think your income goal is high, but doable. You didn't mention (or I missed) average rents for the 4 units you're looking at. If you pay 200K and rents are 1,000 per unit or more, you might just make that goal with 40 units. We make more like $100 per unit per month which is actually considered pretty good. This is after everything though, even a "pretend" 8% management fee.

Steve L. · Answer

I think your plan is doable. As others have said, I don't think financing will be your biggest hurdle. Banks typically want to see 2 years experience to count the rental income. It sounds like your business income is enough to get you the first two. A lot change change in the market to predict 6-7 years out. It seems like every 2-3 years you have to re-evaluate what works and what doesn't work and change your business model. One example, after buying 3 or 4 fourplexes you might be able to buy a 16 unit or something. You might hate managing them. Something you should also think about, is trying to buy the properties under market value. That would really jump start your business model and is how I have been able to acquire many units very fast.

Kimberly T. · Answer

My husband and I have bought a triplex and 3 fourplexes in the past 5 years (so, 15 units total). It's becoming much harder to find good cash flow deals now, so while we're still watching what gets listed for sale, we figure we probably won't buy much (if any) more until the next recession (with the exception of likely doing a 1031 to get rid of our CA triplex). We have conventional loans on all of them, as well as our house, and we still only had to put 25% down on our most recent purchase (6 months ago), not 30%. We also have stellar credit.Whether you can expect $1000 cash flow obviously depends on the rents, taxes, insurance, maintenance and cap ex, etc. We're not getting that kind of cash flow on any of our rentals (we own in CA, AZ, and CO, so we're not just invested in high-appreciation, low-cash-flow areas like CA). I wonder if your cash flow estimation is perhaps overly optimistic. Maybe you could give us your expected numbers and you can explain how you're arriving at that expected cash flow.

Tammy Vitale · Answer

I am not a loan officer but I understand you can now finance up to 10 sfh - up to 4 units is still considered a sfh. I haven't done a commercial loan but I understand from a friend I talked to about them that interest rates tend to be higher on commercial loans. Your 30% down should cover conventional or commercial at this point in time. I pay 25% on my investments (but I only have 5 plus my own house)

Ahmad H. · Answer

@Max Reznik Welcome to the site! You will find plenty of info to help you get where you want to be.I think your goal is realistic. You should be able to net $10k with 40 units without working more than 10hrs/wk.My experience has been that every 10 units, if in decent areas and condition, require about 2hrs/wk worth of work.You should buy the first property and see how much time you are spending there every week. A lot of investors just look at the cash flow but time is money so you should also be noting down when you have to go the property and how much time you are spending on your investment. Recording the time needed to self manage will help shape your investment plan going forward.

Kelly N. · Answer

@Max Reznik- I don't have a target number of properties or units, but would like to replace my husband's income so that he can do something he likes more. I doubt we will stop buying even at that point even.

Max Reznik · Answer

Thank you for your detailed responses!Kelly N,Out of curiousity, is your goal also to purchase 10 properties?Mike H,You mentioned that I can get a commercial loan to get 80 units for example, are you saying there are less restrictions on commercial loans versus conventional loans? And how much % down do commercial loans require minimally?Max