Newbie- Am I being realistic?

Question

Hi Everyone!

I have been lurking on this site for a few weeks and am absolutely amazed by the wealth and quality of information available! Josh and Brandon have done an amazing job.

I have become interested in charting my own course. I understand there are a lot of different paths in real estate investing and I am still in the stage of deciding on a niche and strategy…as well as whether or not this is the right business for me.

I understand that real estate investing is not ‘get rich quick’ as many gurus market, but I am curious about the amount of time that needs to be invested and length of time to achieve ‘success’- I do understand that this varies based on capital to invest, region, effort, goals, etc.

Here is a hypothetical path I would consider:

Buy and hold strategy purchasing 2-4 unit multifamily properties at 20% below cost, investing $40k/year leveraging $160k of property. Purchase one multifamily each year for 4 years and 2 multifamily for the next 6 years. At the end of year 10, I would own 16 multifamily properties- approximately 64 units (assuming fourplexes).

I am figuring cash flow using Brandon Turner’s criteria. Using the 2% rule, purchase properties yielding rents totaling $3200/mo (2% of $160k); with his 50% rule, my NOI should be $1600/mo; $719 is an approximation for debt service ($120k mortgage, 30-year loan, 6% interest) resulting in $881 cash flow/mo. - approximately $10k/year.

At the end of year 10, my 16 fourplexes would cash flow at $160k/yr. My questions to the experienced investors are:

1. Is my plan realistic? With enough leg work and marketing, could I close on 1-2 multifamily properties/year with this set of criteria?

2. Does this strategy sound conservative and make business sense accounting for the ‘unknown’?

3. How much time per week would it take to find properties and manage these properties? (I understand this could vary based on region, marketing strategy, etc…) I have a full time career and family, so this is a consideration.

4. How much of my time/week should I expect if I hired a property management company? It seems that Brandon accounts for property management in his 50% rule.

I am looking forward to all the replies!

Best- Adam

Ziv Magen · Answer

Great plan, concur with all the above - quite possible in theory, but may vary hugely according to markets and unexpected trends/events.

I'd run the financial expansion plans carefully - there are a lot of assumptions thrown in there that would require re-confirming or re-adjusting after the first few properties are purchased - make sure you have a safety buffer, as things tend to slide down-hill fast when you're leveraged and cannot afford repayments.

Best of luck!

Adam Shpall · Answer

Super! Thanks Ryan- That is clear.-Adam

Ryan Logsdon · Answer

Hi Adam Shpall,

You actually can't touch the cashflow either, but you can certainly sell, buy more, reinvest it still within your IRA. You won't be able to cash out until you reach 59 1/2 years old (I believe that's the age .. that's still decades off for me). This strategy is to get additional properties under your control with even higher tax incentives.

And you can amass many properties through your IRA if you do it creatively.

Ryan

Adam Shpall · Answer

Thanks Ryan- When you say you 'can't touch the money', am I correct to assume that you could do anything you want with the cash flow? or is that the money you can't touch until retirement age?

Much appreciated!- Adam

Ryan Logsdon · Answer

One way to make it easier is to have your IRA purchase properties.

There are drawbacks. You'll need about 50% down. You'll be limited in your selection of servicing agencies that can work with retirement funds. You can't touch the money (must stay at "arm's length"), but you can direct all funds as necessary. But it's an alternative method to reaching your goal.

And if you do the PM work yourself on the other properties, and you draw a salary, you can further fund your IRA from the existing properties ... so there's an additional tax benefit for you there.

*edit* Adding clarification as to why it's easier. It's not counted as one of your 1st 4 properties. It's not actually your property at all. It belongs to your IRA.

James H. · Answer

I think interest rates are about 1 to 2 percent higher for loans 5 to 10 but not sure. Am only on mortgage no. 2 right now. Another question is where will interest rates be in 3 years? Nobody knows.

I don't think there is an easier way to get where you want to be. Maybe different ways such as rehabbing to fund buy and hold deals, but not easier. Not that I know of, at least.

Adam Shpall · Answer

Thanks James and Ned!- You both mentioned the challenges finding financing and higher interest rates starting with the fourth fourplex.

By how much do interest rates rise at that point?

Also, any recommendations to tailor the plan to make it 'easier' while still hitting my objective of $160k cash flow in 10 years?

Best- Adam

Ned Carey · Answer

1) Yes this is realistic

2) Basically yes but it will change and evolve over time. One key component is interest rates and financing this will probably be the biggest problem or barrier.

3) Unknown in part will depend on your market and how fast you can get up to speed on knowing real estate and your market.

4) With the right property manager it shouldn't take that much time. It is certainly something you could do with a full time job.

Good luck - Ned

James H. · Answer

Depends on how much money you have to start with. You are going to hit financing barriers between 4 to 10 4plexes and will have to look for higher interest rate alternatives beyond that.

Is it realistic to find two 4plexes per year at 20 percent equity? Not really if you stay local. Why would anybody sell something for 20% less than its value? Just because? No. So that means you need to bring value in through rehab (more money out of pocket to add to your 40K) or be able to close very quickly and/or not need financing at all.

Your plan is a good road map, but I would not expect it to happen unless you already have a bunch of money. Otherwise, I would expect it to take longer than 10 years.

This is just my opinion based on my own limited experience. I would say 20 years would be more realistic.

Newbie- Am I being realistic?

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