Newbie looking for guidance - buy and hold strategy

[Kyle Sprague]

I'm so new to this world and looking forward to the immense growing that will take place.  Here to be a sponge and apologize if this question is silly to most of you experts, but that's why I'm posting, to hopefully learn and absorb from all of you pro's!  This is my first post and just signed up on bigger pockets, inspired to follow this passion of being a rental property investor.  

Anyway, I'm deciding how to enter the game and one of the ideas I have been juggling about is how to initially replace my current salary through cash flow investment, so I could focus on rental property buy and hold investment full-time while also getting some work-life balance back in my life from my 14 - 15 hour day salaried position.  My question revolves around this and I want to use an example to set it up.  

Just to dumb this down a bit, let's say an SFR buy and hold cash flows $300 per month. If I started with 1, I would need to scale to 10 before I could quit my current job and replace my current salary ($3,000 cash flow). I make more than this now, but to comfortably pay the mortgage on my current house, etc. I would need to cash flow $300 on 10 units at least to sustain my current lifestyle. This could take years, given that I am absolutely starting fresh in this game as a whole and have so much to learn. That leads me to my question. Why not just buy a portfolio of 10 SFR buy and holds as the initial investment right out the gate? What are the cons to this? What holds people back from being able to do it? Why wouldn't everyone be doing it if it were that easy? Why would 95% of REI that aren't corporations start small and scale large if it were that simple? The answer for me is "I don't know". It seems like only the bigger fish are able to do this based on money in the bank, but if you're using private lending or hard money lending, etc. why wouldn't someone just go that route to start vs going one by one over the course of multiple years - just go big? I should also mention that I have nowhere near the personal down payment it would take to buy a portfolio of 10 properties, but assume that could all be obtained through the different funding strategies out there? Apologies again if this is the most ridiculous sounding question of all time.

[Tim Roberts]

Good advice from @Amanda G. and @Brent Paul

@Kyle Sprague what is your expertise?  What do you do for a living?

Experience is key in becoming a real estate investor and dealing with lenders.  A lender makes loans on many different factors.  Going big is not necessarily a bad thing but there are specific rules to lending on properties (1-4 units).  With the Dodd Frank rules most commercial lenders avoid lending on single properties and would refer you to a residential mortgage lender.  The government wants there to be a line between residential and commercial lending if possible.

You can own up to 10 individual financed properties through a residential lender.  This is Freddie/Fannie guideline.  A residential loan looks at your stability, qualifying income, credit, debt ratio, and loan structure come into play.

Starting in the residential arena is a little easier because if you have stability, good credit, and your debt ratio (45% of income covers your credit debt) then it comes down to the property, appraised value, and down payment (20%-25%).  A residential lender can use a factor of market rents to cover your new purchase.  That means I can qualify you on someone else making the payment on the investment property.  Buying one property is not a bad way to go initially.  Then two and three... Yes, it starts small and feels slow but I have investors that I work with that have their 10 properties in 5-7 years.  We can talk about how if you are interested...

Once you have one or two individual properties, and you can show a commercial lender you have real estate investment experience you could look to "go big" and buy a portfolio.  You still may get push back but what a lender is looking for is if you can qualify for the 10 properties dark.  Dark means can your W2 income cover all of your credit debts plus this investment portfolio you want to buy.  Commercial lenders still look at the rents and coverage but if you are a new borrower they will want more cash down or shorter terms to limit the lenders risk.

Lending terms on commercial lending are different than residential lending.  You usually need 25% down at higher interest rates than residential (maybe 1-1.5% higher) and the amortized payments are cut to 20-25 year terms.  Rates are based on 5 year terms, and most often you will have a 10 year balloon.  You also will not cash flow as well unless you have a lot of equity in the new purchase.

It really comes down to what your experience is, what you do for a living, and what your investment strategy might be.

How did you come to the decision to become a real estate investor?

Your Friend in the Mortgage Business,

Tim