Real Estate Purchasing Addiction.... When is it too much?

Question

Hey guys!

I am 26 yrs old... I think I am an addict to real estate. Last year, I made it my goal to purchase 4 properties in a year.... I only got 3. This year, I have the same goal, I might close a deal next month already.

If everything works out, I would have hit the 4 finance properties. I will owe in mortgages approximately 272k. I made a few mistakes along the way though... pay to much for some properties... But I am not into flipping. I just want to buy and hold.

I know in a few months, I would have save enough to obtain financing again. But, I also know I could pay 1 property in a year if I wanted to.

But in my mind I just hear... Save money and buy. Save money and buy. It might sound stupid, but in my mind, I want to be a millionaire.

What is the best strategy? Would it be better to pay one mortgage off or continue buying and getting in debt?

Thanks!

Raul

James Wise · Answer

there is nothing wrong with using leverage on all of your properties. Many fortunes have been built this way.

Just use leverage responsibly. Dont buy just because you can. Buy because the deal makes sense.

Steven J. · Answer

You don't want to leverage yourself too thin. Thats what happened to many of the 'flippers' in the crash in 07-08. Every body was buying up homes left and right with no savings and when the market tanked. All of a sudden these guys were underwater. I would suggest you figure out what your comfort level of stress is and figure out what how much debt you want to be holding versus your savings. If the worst happened once again, could you survive?

Simon Campbell · Answer

I agree with the comments here. Before moving on to other properties make sure of the following:

(1) All your current properties are generating cash flow - money in your pocket every month after setting at least 5% aside for capital repairs, 10% for vacancy and paying all other expenses including mortgages. If not, sell the non-performer and replace it with a better investment.

(2) Make sure that you have 6 months of living expenses set aside in savings. Make sure that you have a capital reserve fund that is large enough to pay the mortgage on all your properties for at least 3 months. This creates a safety net for a worst case scenario.

Once that is established, then continue to use leverage to purchase good investments - but be patient. Make sure they are good investments and not just any investment. Because you will quickly reach the 10 loan limit and that's when the awesome investment passes you by.

Joe Villeneuve · Answer

...buy with leverage if the deal makes "dollars".  Too many REI buy when it only makes "cents", and that's when they get into trouble when the leverage it.

How much is too much?  When you start rationalizing a bad deal into a good one, because the number that drives you is "how many properties" instead of "how many dollars".

J Scott · Answer

In addition to Steven's comment, I'd suggest making sure your current holdings are all reasonably good deals.  You admitted that you made some mistakes in the past, which likely means that you're still learning -- nothing wrong with that, but don't get so far ahead of yourself that you risk finding out that many/all of your deals aren't as good as you thought they were.

What kind of numbers are you seeing?

Simon Campbell · Answer

The best way to make a decision is to create a spreadsheet analyzing your cash flow with and without mortgages over, say, the next 5 to 7 years. Factor in a property appreciation of 3% per year (conservative but at least keeping with inflation).

Eventually, you are going to run into problems getting other mortgage. Honestly, I would max out as many mortgages as I was traditionally able without taking on too much financial risk. Then when the banks start fussing about jumbo loans or 6 months of reserves, start paying off the mortgages. Once one is paid off, invest in another.

Great retirement plan!

Jerry Padilla · Answer

@Raul Ruvalcaba  I think you have great motivation. Once you move onto purchasing the fifth property you will need 6 months reserves for each property in the bank, to get that fifth mortgage. I say as long as you have the 6 months or more reserves saved up, go for it! It is great that you can handle all the mortgage payments with your job.

Raul Ruvalcaba · Answer

I don't follow the percentages for all the unforeseen expenses since I really heavily on my job for mortgage payments and what not.

My mom had a couple rentals as well... but I as soon as I got a source of employment and my real estate license.... I took the investment to a whole different level. Now I just wish to own 20 properties before I reach the age of 35. Lets see what happens.

Thanks for the help!

Raul Ruvalcaba · Answer

Hey guys!

Well, its a positive cash flow that's for sure. The  three rentals I have generate $ 2,600.00 per month minus mortgages of  $1,415.00.... Which leaves me with $1,185.00 per month. But I pay all  mortgages with money from my full time job and deposit the $, 2600.00  into my savings account and save up again for a down payment.

I  am able to do this because 1.) I live at home with my parents 2.) Have  no car or mortgage payments of my own and 3.) All my debt generates  extra money for me

The mistakes I made have been a result of  purchasing a little high. But I reason... any type of real estate  investment is a good investment. I rent at an average price... not to  high to make it hard on tenants to pay each month.

However, I  don't follow the rules several have about saving for this and that since  I really heavily on my job to make the mortgages payments. I just keep  saving and saving. I know in 4 months I'll have enough for another down  payment. But I don't know if I should pay a property and then move on.  My mortgages are as follows 2 under 60k and 1 under 92.

Thanks for your help guys. I will consider all the input.

Robert Blanchard · Answer

How much are you setting aside for each property for vacancies, unforeseen expenses and other things?

There are many threads on BP that go over the exact numbers and such.

What got you started in REI?   Just wondering since you are under 30 years old.  If you add 1 property a year for 15 years,  you should not have a problem of owning over half of your properties free and clear.  If I had gotten started earlier, the thought of having 20 rentals before reaching 50 years of age, really motivates me to accelerate my investing so I can have monthly rental checks coming to finance my retirement years.

Real Estate Purchasing Addiction.... When is it too much?

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