How to Scale MF Rental Business

Question

Hello Everybody,

A friend and myself have been researching investing in real estate together for a little while.  We both agree that we would like to be in the rental space and would eventually like to turn this from a side hustle into our full time jobs.

Baby steps...

One thing we are having a hard time figuring out/understanding/strategizing is how we go from one property, to two, to three, five and more.

If we each put 10k or 15k down for our first multi-family rental, that would be all the funds we could both invest.  From there, without outside investors, I don't understand how we would be able to buy another property in a reasonable timeframe to scale our business.  It would take several years before even breaking even from the CFs from the initial property.

If we needed to bring in outside money (would be from family), what kind of deal structure would typically satisfy an investor in this type of situation?

I just don't want to see us buy 1 house and be stuck with just that one house for years until we save/make enough to buy another.  I want to be able to buy a house and buy 2 more within 3 years.

Brandon Ingegneri · Answer

You need to get your first deal under your belt and learn the ins and outs of being in the business.  There are going to be hurdles and obstacles that you will need to overcome prior worrying about scaling.  You will realize that it is not as cut and dry as you may think, and more immediate concerns will require you learning how to properly navigate them prior to worrying about something off in the distance.

If you guys have about $30,000 to your names to invest, it is the wrong time to be discussing scaling.  A business needs capital behind it.  It can not be effectively done leveraging everything and having no reserves or working capital in the bank.

When you are ready to scale, and have built the funds and equity to do so, there will be more options available to you.  You can utilize hard money, you can get a few FHA loans if your a solid loan applicant, and so on.  There are opportunities available for the next step, but it is important to not overlook the steps that are immediately in front of you first.

Llewelyn A. · Answer

@Michael L.

I think you are NOT putting the "Cart Before the Horse."

If you think scalability NOW, you will do things differently than if you were not thinking of it at all.

I own several Brooklyn multi-Family with Partners. My partners DON'T think about scalability and that became a  problem.

However, since they defer to my guidance as the most experienced Partner, I implemented several scalable solutions ahead of time.

For instance, don't buy a rental and NOT use a rental collection website. Generally, it's very cheap. The more expensive ones have Maintenance and Accounting. You can start with something like Cozy.co and when you grow more, you are already scaling your Rent Collection process. You will be building your knowledge of it and start to understand how to do other things like electronic Applications and Tenant Screening.

Some of these things will be more of a cost of your time to learn. Some will have actual impact to your bottom line. For instance, having a very good, reliable Smart Phone is huge. I forced my Partners who were still old school to utilize their Smart phones better. Things like paying Contractors etc. can be done very "Smartly."

Anyway..... yes, I do agree with others that you need to get your first Investment because you need to learn the operations. But, by thinking scalable already, you will be thinking to yourself, how do I streamline this business process so that I can save time and money when I grow the business?

Michael L. · Answer

One other option I thought of would be to start off with wholesaling since it is less labor intensive and would allow us to build up a larger capital base before jumping into a rental...

Not sure if we would be able to get enough wholesale opportunities to make this feasible though.

Brandon Ingegneri · Answer

Search for the proper deal where you are buying at an actual deal where you are buying with equity or will have the ability make improvements to add equity.  If you have some money in the bank and some equity, you will have overcome two obstacles with moving forward from the initial deal.

If you are doing traditional FHA loans, you will need your personal finances in order.  LTV, debt to income ratio, good credit, cash in the bank, etc.

Michael L. · Answer

Maybe I should have phrased things a bit better or not included a specific number of houses or a specific number of years.

I'm not looking to grow this too quickly unless of course that is feasible and reasonable.  I see this as a business venture that will take several years to turn into an actual business rather than a side hustle/passive income.  I don't see my partner or I wanting to take on more than we can handle as we both work demanding full time jobs.  I see it as growing organically as we are willing and able to take on more.

I guess I'm really looking for financing advice on how to start without limiting ourselves to one property for several years.

Things that come to mind are taking on a couple of outside investors (family), promising them X as a return rate, and once that is returned, they no longer own a piece of the property.

Another would be to split the house with outside investors and let them remain investors in that specific property for perpetuity.  A twist on that would be to include some type of buyout clause after X number of years of participation.

Can't think of many other ways, which is why I'm here!

Brandon Ingegneri · Answer

I absolutely understand what you are saying. It is a great thing that you are planning for a little down the road.  This is especially true considering that most people don't even plan for tomorrow, next week, or next year.  I certainly am not trying to discourage you, but I have seen people grow too big to fast and it creates more problems.  Doing so gradually, consistently, and systematically will definitely be more beneficial in the long run.  You may see someone grab 10 to your 2, but if you are doing so more efficiently and in a more fiscally stable manner, you will have a portfolio with a solid foundation where that other person may have a larger one built from a house of cards.  Just some food for thought. Trust me, all of this comes from having made these mistakes myself when I was starting out prior to sites like this and available resources.  It was trial by fire and learn as you go until you strung enough deals together to the point where you knew the ins and outs.

Antoine Martel · Answer

Michael.

I have been in a similar situation and have therefore created a real estate business which creates active income as well as passive income. This could be another option for you, however, it is a full time job and takes a lot of work to build a business like that. I am doing it full time.

Michael L. · Answer

Totally agree that we have to get involved to learn.  I guess I'm more of an analytical/planner type where I like to learn as much as I can about what I'm looking to get involved in and be able to outline a reasonable and feasible plan before diving in.

It feels like to me, if we start with just one house, without a plan for how to get another one or two, then we will potentially shoot our load or prevent ourselves from other opportunities by not considering how to move forward.

I don't want to put ourselves in a position where we could have managed our financial situation better from the start that would allow us to do what we want to do...

How to Scale MF Rental Business

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