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Updated over 7 years ago, 04/05/2017
Accumulating Rental Properties
I'm working on finding a rental property as my first deal. For right now, I'm focusing on pretty much turn-key properties. If I stick with this and spend all of my money allocated for real estate on this first property, how would I go about getting my next property (and more after that)? If I was to get a loan for 80-90% of the equity in the house, I'd quickly reach the point of diminishing returns and I might have a 'seasoning period' to take into account as well. It seems like this isn't the best way to build a portfolio. Or it would just take forever to save up enough to buy the next house each time (depending on my savings rate, of course).
I have no experience w/ renovations, but I feel like BRRRR is the only way to build a portfolio in a reasonable amount of time.
Real estate is a get rich slowly game. The vast majority of what you do will take some time to come to fruition. Eventually, things can start to snowball, but for most regular people trying to get into the game you just have to start somewhere, then keep chipping away at it.
If you have enough cash to get a property or two going, do that. You might also be able to use equity in your personal residence as collateral for a down payment on another property. Then it may take a couple years for things to build up enough to get your next property. Keep doing that and one day you'll wake up and have a nice portfolio.
I'd make a lousy guru, because I won't tell you that you can get rich with no money and no experience. I'm just trying to give you my realistic view. Most of what you see out there about people becoming millionaires overnight simply isn't true, or they are very rare cases that have less chance of being repeated than buying lottery tickets.
Don't mean to be a downer, just a realist. Good luck.
Thanks Wade, I completely understand. I don't have expectations of a get rich quick scheme or anything like that. I only have enough for about 20% down on this first house, so I probably won't be able to get another for a while (unless I get equity out of my personal house, but then that would only be about one more home).
Just wondering if I need to change my strategy or if I should just keep chugging along.
@Andrew Merritt You basically have two conflicting strategies from a time-management perspective. The theoretical advantage of turn-key is that you can keep your job, have a rehabbed property, have PM in place, have a tenant in place, etc. In short, you just get the check on a monthly basis. It's not really that easy/simple/hands-off but that's at least the theory. BRRRR has that pesky R for "Rehab" so you're buying a property that needs attention, rehab, getting a tenant, etc. I'm sure you could do that while having a job but it's not nearly as easy to balance as a turn-key purchase. So with turn-key you get to 'reload' through your W2 and the income. If you can't dedicate as much time to to your career/job/W2 because you're doing/managing the rehab how will that impact your ability to reload for the subsequent purchase?
Fair point. Perhaps I'm just getting ahead of myself and wishing I had started years ago!
I've said this before but I'll repeat, I would much rather look and complete one BRRR then buy 10 turnkey properties. I did two BRRRR this past year and have 150k in equity and $800 a month in cash flow without any of my money left in the houses once the 2nd refinance is done in 6-8 weeks. Had I bought these two houses as turnkeys I would be out 120k for the downpayments (25%) and be cash flowing next to nothing. How long to make back my 120k down payment at even $800 a month? No thanks. I use to think that saving up a down payment for each house was the only way to do it until I did my research and realized that isn't the best way to do it. I can build my portfolio as quickly as I can find the next deal (admittedly I'm struggling to find the next one right now). Every BRRRR won't work out perfectly and allow you to get 100% of your money out, but if you do your numbers correctly you should never have much left in the deal.
@Andrew Merritt I found these two from direct mail. I'm currently doing direct mail still but haven't had any luck the past couple of months. I also watch the MLS (I'm licensed), reached out to every wholesaler within 90 minutes of where I live, watch zillow etc. I also "drive for dollars" and look for vacant houses and contact the owners. I've also knocked on doors of pre foreclosures. I've got one potential house I'm looking at locally (MLS foreclosure) hoping that turns into my next flip. I"m a bit frustrated at the moment since I don't have a deal going.
Yup, I bought my first property ($17k) and renovated ($16k) with cash. Used the equity in #1 and prospective equity in #2 to buy #2 ($36k) with a hard money lender (my attorney). He gave me a $65k loan in exchange for liens on both properties. Bought #3 with a straight loan from my hard money lender with 2nd position liens on #1 and #2. (same attorney).
At this point I established approx. $95k in lines of credit and personal loans. Basically building up my access to capital.
THEN i did the BRRRRRRRRRRR approach to #4 flat, #5 flat, and #6 flat cash out refinancing into conventional mortgages.
Up to 6 buildings / 9 units and looking at a triplex as we speak.
- Rock Star Extraordinaire
- Northeast, TN
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Your first couple of buys are going to be a bear, especially when you're starting with (essentially) nothing. Once you get rolling, and assuming you keep working a "regular" job, the snowball effect will be stunning. Most people who have trouble with this either want to live off the proceeds immediately or have no money to start with in the first place.
- JD Martin
- Podcast Guest on Show #243
@Justin C. that's great and exactly what I'd like to do. Where did you find your first property? I think an auction would be the best place to find it but I don't have any experience there either. I definitely don't want to make a huge mistake w/ my first property which is very possible w/ an auction.
@jd
@JD Martin that's kind of what I expect. Just like most big things, the first one is usually a lot more work/effort than the ones after. Just like stock dividends, I'd plan on reinvesting whatever I make from the first on into the next and so on.
Don't overthink it. There are plenty of people who spend years planning next 10 years in the spreadsheet and guess what? It will never work exactly as they planned. The only way you will have an opportunity to do the second deal is if you do the first one :) It is an uphill road, and you have to put one foot in front of the over. But higher your climb - more things you will see, more opportunities you will have. Here is an example: I got a house for $50k cash in 2011. In 2014 I have paid $5k for the similar house in similar area. But without deals I was doing in 2011, 2012 and so on, I would not end up with the steal in 2014. Good luck.
@Andrew Merritt As you may know, an investor makes his/her money on the front end, not so much on the back(sale). Starting out as a turnkey investor typically means purchasing at or close to market value. Unless you have a large amount of cash set aside you can plan to be into a property at 30% of the purchase price per deal(Your cash) This is not really a sustainable strategy, especially if your buying SFR's unless your getting them very cheap. You didn't mention your price point in the post nor did you mention your current cash available for investing however so difficult to fully advise. BRRR would be a great way to go on a 2-4 Unit property and an FHA mortgage. less out of pocket and tremendous upside on cash flow. Best of luck. Persist and you will WIN!!!!!!!
@Andrew Merritt Since it seems as though you have the money to pull off a BRRRR, do you have the time?
One thing people overlook is the time needed to successfully complete a BRRRR vs buying a property that is rent ready for closer to market value.
You have to try and put a value on that time. Also, are you going to buy a single family or multi-family? Big difference in terms of rehab scope between a 1000-1500 sq ft single family and a 2500-3500 sq ft multi family.
- Michael Noto
Lots of good advice in this thread and on the forum. When developing a strategy you have to consider a few variables and how they apply to you based on your preferences:
- Money Invested
- Time Invested
- Risk : Financial and Market
- Reward
So with these variables in mind you have to really think about what steps you're going to take. I really like the idea of BRRR because if theory becomes reality, you'll have a property that cashflows with very little of your own cash locked up. And you can easily do multiple deals every year (provided you find deals in your area) and build a portfolio quickly. So you'd have to ask yourself, do you have the time and know-how to invest in a BRRR property and see it to completion. You have to ask yourself if you can work with hard money lenders (often needed for this strategy unless you're sitting on a pile of cash) and take on the risks.
When it was my time to develop a strategy, I looked at my current profession and deemed that I did not want to give it up or compromise it with real estate investing so I went for a more passive route. The benefit is that the strategy is low risk, less time consuming, and a good learning experience as a first deal. I can always do BRRR (it doesn't require as much of my own cash down) once I have the team in place which is what I am building with my first rental.
@Shawn Ackerman You've highlighted my main concern with regards to buying turn key. I failed to mention it above but I only have about $40k, so about 20% down on a $200k house. After that, I'll have to wait (probably a few years) until I can accumulate more cash for another down payment b/c it's not like I'll be getting super significant returns on my rentals, probably <$200/month taking capex, vacancy, etc... into account. Have you found that the best place to find BRRRR properties is auctions, or do you have other places you usually find them?
@Michael Noto I think I do have the time to manage a BRRRR. I don't have the time (or skill) to do the work myself, but I think I can put in some time to manage and coordinate. I know it will take a lot more time for the first few to get my systems set up, but that's an investment I'd like to make. I'd like to buy a multi-family, but there's not a whole lot around me that are available (and in a non-dangerous neighborhood).
Andrew, I like your plans
we bought a rental duplex in 2005...not turnkey (one side needed work) but rentable pretty quickly. after learning a lot, we just got into BRRR in summer 2016. working on purchase #3 (rental unit #4) now. good luck!
@Andrew Merritt there is the possibility of doing a partial BRRRR to help leverage your money a bit further. You can purchase the home and pay for the rehab with a proven, high volume turnkey provider. You can then refi and realize most of your down payment back and do it all over again. This provides the ability to do more of a passive BRRRR and another option for investing. Happy to provide more details via PM.
Originally posted by @Andrew Merritt:
I'm working on finding a rental property as my first deal. For right now, I'm focusing on pretty much turn-key properties. If I stick with this and spend all of my money allocated for real estate on this first property, how would I go about getting my next property (and more after that)? If I was to get a loan for 80-90% of the equity in the house, I'd quickly reach the point of diminishing returns and I might have a 'seasoning period' to take into account as well. It seems like this isn't the best way to build a portfolio. Or it would just take forever to save up enough to buy the next house each time (depending on my savings rate, of course).
I have no experience w/ renovations, but I feel like BRRRR is the only way to build a portfolio in a reasonable amount of time.
Going with a turnkey is a great way to earn passive income when you live outside of the market. Just make sure you research the provider you go with. Some agents just throw the word "turnkey" around trying to describe a home that doesn't need a lot of work. In reality a Turnkey is an actual investment strategy. Don't go with some agent, go with a provider.
Feel free to look at:
How to Find the Right Turnkey Real Estate Investment Company for You
and
The Best Types of Markets for Profitable Turnkey Properties
For more help.
Send me a message if you would like. Best of luck!
Maybe I can give you some hope. I bought my first house in April 2010. I bought my second in August 2012, almost 2.5 years later. It can be slow goings, but I got up to 13 SFR's by mid-2016. It's definitely a curve that starts out slow and shoots up quickly. Every time you buy a property, that cash flow goes in with whatever else you can save and gets you to that next one that much quicker.
It's important to note I haven't taken a dime out yet, I put everything back into acquiring new properties and will continue to do so for quite a while.
Thanks @Tom Ott, I'll check out the links you sent. I've been contacted by a couple of turn-key companies because of this post. Definitely looks like a cool option but I'll need to figure out how to vet them.
@Justin B. that's quite the exponential growth! Were you still looking after the first one for 2.5 years or just waiting on funds to accumulate? Do you think you would have gotten where you are now faster if you had done BRRRR?
I was always looking but it was truly the funds that kept me from getting #2.
And yes, probably if I did BRRRR, but that usually requires renovation money which I didn't have (and wasn't comfortable using private lending to do it at that point). I have done a couple of BRRRR's to date.
This is a great thread and it illustrates that there are multiple ways to make money in Real Estate. I am of the mindset of a hybrid between the Turn key buys and the rehab purchases....
I look for properties needing cosmetic stuff that can be had for a discount for one reason or another. It could be an estate sale, it could be a divorce, could be a distressed owner or short sale Etc.... Admit tingly these are harder to come by and fewer and far between.....
The goal is to have minimal work to get the building operating. I self manage everything I own (approx. 26 doors) and also work a full time job (which enables me to recharge as it was put here) I absolutely do not have the time or energy to manage a full rehab as this would interfere with my day job. But the typical property I buy is usually older needing some updates but definitely rentable without needing gut rehabs in kitchens bathroom Etc.... I have a love affair with brick properties as these will require virtually no exterior maintenance, brick is timeless, has character and gives a nice clean look in my opinion. Never a need to paint or side.....
Another strategy I tend to utilize is when I have a property UC I can usually get the realtor to allow me to start to show it to prospective tenants and ideally I strive to have the unit rented prior to closing. This allows you to start cash flowing immediately (assuming you are buying right) typically if I tell the tenant I plan to replace this this and that in the next few months IE. light fixtures, maybe paint, maybe a bathroom vanity Etc.. they will be ok with this. There is nothing worse than an empty rental, actually I take that back there is..... a bad tenant!!!!!
In short find what you are good and and be persistent. Persistence pays off!!!
good luck,
Chris
@Justin C. nice work! I need you as a mentor!